THE RISING EURO HAMMERS AUTO PARTS MANUFACTURERS

PRESENTED BY:GROUP 4

Case facts:SMS Elotherm: CEO-

Udo Pfeiffer manufacturer of machine tools.

German

Signed
Profit: After

deal worth $1.5 million with DaimlerChrysler.

30000 euro each. Profit decline by 8000 euro (exchange rate- 1 =

3 days, dollar slid against euro.

RESULT:-

$1.33)

Keiper: Manufacturer of In

metal frames for automobiles seats.

2001, opened plant in London, Ontario(Canada). US operations of DaimerChrysler.

Supply

Advantages:-

1) US dollar had also depreciated against the Canadian dollar.

2) Euro had also appreciated against the Canadian dollar.

Q&A:1)

Could SMS Elotherm have taken steps to avoid the position it now found itself in? What were those steps? Why do you think the company did not take these steps?
Yes, SMS Elotherm could have avoided this position they found themselves in by hedging part of their funds. They could have also tried to enter a contract where their selling price would be proportional to their manufacturing costs and stated both in the same currency. They probably did not take any steps to protect their money since they were achieving a very large profit (30,000 euros per machine) and hedging would also cost them money which would decrease their profits.

A)

2) Why was Keiper weathering the rise of the euro better than SMS?
A)

Keipers manufacturing plant was based in Canada, and hence their manufacturing costs were also in Canadian dollars. The Canadian dollar is also close to the US dollar so that any depreciation would not affect it as much as the euro. Due to this, the exchange rate fluctuated less and so they did better than SMS Elotherm.

3) In retrospect, what might Keiper have done differently to improve the value of its real hedge against a rise in the value of the euro?
A)

Although Keiper had created a sort of hedge by basing their plant in Canada, they could have also invested in a forward contract as further precaution.

4) If the US dollar had appreciated against the euro and Canadian dollar, instead of depreciating, which company would have done better? Why?
A) If the US dollar had appreciated against the euro then SMS Elotherm would do better but if the US dollar had appreciated against the Canadian dollar, then Keiper would do better. Regardless Keiper had a hedge against the value of the euro so they would still do okay.

THANK YOU : )