|Question 2.||Question :||(TCO 6) Volkswagen saw a 95% drop in its fourth quarter profits after an unexpected surge in the value of the euro left the company with losses of $1.5 billion. Traditionally, Volkswagen, which produced its vehicles in Germany and exported them to the United States, hedged some 70% of its foreign exchange exposure. However, in 2003 the company made the unfortunate decision to hedge just 30% of its exposure.|
Volkswagen saw its fourth quarter 2003 profits tumble 95% after losing €1.2 billion in currency losses after the euro rose relative to the U.S. dollar. Why was Volkswagen so vulnerable to the change in the value of the euro relative to the U.S. dollar?