Hedging By Hybrid Manufacturers

Transcription

1 Hedging By Hybrid Manufacturers Team 3 Meghan Bennett Adam Cummins Mark Doucette Jose Genao Megan McLaughlin Vijen Patel Monday, April 30 th, 200

2 Gaining Popularity of Hybrids Utilizes both a gasoline engine and an electric motor High fuel prices, erratic supply of foreign oil Fewer emissions Becoming more sophisticated and user-friendly More traditional styling, better performance Low cost More models to choose from Toyota Prius the most successful Currently holds 55% market share

3 The Gas/Hybrid Relationship U.S. Hybrid Car Sales Sales Gas Price Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan Cents/Gallon Correlation = 0.837

4 The Gas/Hybrid Relationship Low profit margin for hybrid models A small decrease in sales not enough money to cover costs Is it possible for a car company to hedge against the risk of decreasing gas prices?

5 Gas v. Oil Prices Gas Price Gas Pric Oil/bbl Jan-04 Jan-05 Jan-06 Jan Oil/bbl Correlation =.898

6 Oil Market Light Sweet Crude Oil Most liquid commodity within oil market Highly correlated with many other commodities Used in multiple hedging strategies Minimize exposure to an unwanted business risk, while still allowing the company to be profitable Involves establishing a position in the futures market that is equal and opposite to a position at risk in the physical market

7 Possibilities for Hedging If gas prices decrease, more fuel inefficient automobiles will be purchased and Prius sales will decrease Futures Forwards Write Call Options Short Oil Companies Short Suppliers Short Competitor Companies Invest in Transportation Companies Buy Put Options

8 Hedging $ Sales Profit Profit of Put Expected Losses in Prius Sales } Premium Price of Oil Gain/Loss of Payoff = max {[K S0],0}

9 Hedging With Options Utilize put options on crude oil futures Method: Collect historical data and calculate correlations Gas Prices Oil Prices Hybrid Sales Focus on the Toyota Prius and based on the most recent sales figures, calculated break even sales and work backwards to find the corresponding gas/oil price Determine possible lost sales if gas prices drop and how many put options Toyota would need to counteract the loss

10 Data Collection Prius and Hybrid Sales Toyota Dealerships Green Car Congress Monthly Gas Prices Energy Information Administration Oil Prices Weekly Calculated monthly averages for comparison to oil prices OPEC Monthly

11 Correlations Correlation Formula " X, Y = Cov( X, Y )!! X Y = E( XY) # E( X!! X Y ) E( Y ) Gas Prices vs. Oil Prices Light sweet crude oil is used to produce gasoline for cars Change in the price in oil allows for prediction of gas prices to move in the same direction Oil Prices vs. Hybrid Sales Compared in order to price options regarding oil

12 Correlations Gas Prices vs. Hybrid Sales High correlation allows car companies to estimate number of hybrid cars to be sold based on gas prices U.S. Hybrid Car Sales Sales Gas Price Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan Cents/Gallon

13 Correlations Gas vs. Oil Oil vs. Hybrid Sales Gas vs. Hybrid Sales Correlation Value High correlations allow for companies to forecast future prices accordingly

14 Cost Structure Variable Costs Varies as output increases Same Amount Per Unit Prius Direct Materials Steel, Glass, Plastic Direct Labor Assembly Line staff Fixed Costs Stays constant as output increases Prius Rent on factory building Security Cleaning Variable Costs Fixed Costs Number of Priuses Produ Number of Priuses Produ

15 Profit Map Break Even Point Total Sales Profit Area Dollars Total Costs = FC + VC Loss Area Fixed Costs Units

16 Prius Cost Structure Sale Price Per Car (MSRP) $22, Profit Margin Per Car 6.64% Total Cost Per Car $20, VC% 75.0% Variable Costs Per Car $15, FC% 25.0% Fixed Costs per Car $5, Priuses Sold 19,156 Total Fixed Costs $99,528,504.2

17 Break Even Calculation Sale Price Per Car (MSRP) $22, Profit Margin Per Car 0.00% Total Cost Per Car $22, Variable Costs Per Car $15, Fixed Costs per Car $6, Total Fixed Costs $99,528, Fixed Costs Per Car $6, = = 14,959

18 Sensitivity Analysis Sales Price Variable Costs Break Even Prius Sales$12,000 $13,000 $14,000 $15,000 $15,542 $16,000 $17,000 $18,000 $19 $18,000 16,588 19,906 24,882 33,176 40,484 49,764 99,529 #DIV/0! -99 $19,000 14,218 16,588 19,906 24,882 28,778 33,176 49,764 99,529 #DIV $20,000 12,441 14,218 16,588 19,906 22,324 24,882 33,176 49,764 99, $21,000 11,059 12,441 14,218 16,588 18,234 19,906 24,882 33,176 49, $22,000 9,953 11,059 12,441 14,218 15,411 16,588 19,906 24,882 33, $22,195 9,762 10,824 12,145 13,833 14,959 16,066 19,159 23,726 31, $23,000 9,048 9,953 11,059 12,441 13,344 14,218 16,588 19,906 24, $24,000 8,294 9,048 9,953 11,059 11,767 12,441 14,218 16,588 19, $25,000 7,656 8,294 9,048 9,953 10,523 11,059 12,441 14,218 16,

19 Prius Profit Map Total Sales = ($22,195)(Priuses Sold) 14,959 Cars Profit Area Dollars Total Costs = 99,528, ($15,541.55)(Priuses Sold) Loss Area FC = $99,528, Priuses

20 Break Even Oil Price Remember that Hybrid Sales, Gas Prices, and Oil prices are correlated 14,959 Prius = $2.57/gallon = $62.22/bbl U.S. Hybrid Car Sale s 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 - Sales Gas Price Jan-04 Jan-05 Jan-06 Jan Cents/Gallon Gas Price Gas Pric Oil/bbl Jan-04 Jan-05 Jan-06 Jan Oil/bbl Correlation =.84 Correlation =.90

21 Histogram Last 6 Months Frequency $50.00$52.00$54.00$56.00$58.00$60.00$62.00$64.00$66.00 Price of Crude O

22 Distribution of Oil/Gas Prices

23 Expected Losses When Oil < $62.22 Priuses Sold 9,746 Revenue $216,312,25 (-) Total Variable Costs $151,467,79 (-) Fixed Costs $99,528,504 Total Profit ($34,684,046 Priuses Sold 9,082 Revenue $201,574,99 (-) Total Variable Costs $141,148,35 (-) Fixed Costs $99,528,504 Total Profit ($39,101,871 Priuses Sold 7,166 Revenue $159,049,37 (-) Total Variable Costs $111,370,74 (-) Fixed Costs $99,528,504 Total Profit ($51,849,881

24 Expected Net Loss P e r c e n t i l eo i l / b b l Gas PricePrius Sales E [ l o s s ] Price Per Option P r o f i t / o p t 20.81% $62.22 $ ,959 $0.00 $0.57 -$ % $60.15 $2.46 9,746 $34,683, $0.57 $ % $57.86 $2.35 9,082 $39,101, $0.57 $4.07 5% $52.39 $2.17 7,166 $51,849, $0.57 $9.54 Total E[Loss Exercise] Total E[Profit/Opt Excercise] Options Needed Money Needed $23,410, $ ,709,312 $6,104,307.9 Put Option Exercise Date: June 1 st, 2007 Break Even Oil Price = K = $62.50

25 Hedging With Put Options $ Sales Profit Profit of Put Expected Losses in Prius Sales $62.50 $63.10 } Premium = $6,104,308 Price of Oil Gain/Loss of Payoff = max {[62.50 S0],0}

26 Government Assistance Purchasing options allows a particular company to hedge against the risk of oil and gas prices declining and thus hybrid sales declining, but how can the government help companies? Credit Trading Emissions and Fuel Economy Help Keep Hybrid Sales Up Direct Aid

27 Help Keep Hybrid Sales Up Consumer Tax Incentives Tax credit for purchasing a hybrid $3150 for buying a Toyota Prius Governments Purchasing Vehicles Increased Gas Tax

28 Direct Aid Subsidies Company Tax Incentives Well-crafted tax incentives can accelerate adoption of new technologies and strengthen domestic manufacturing. Elizabeth Lowery, GM Vice President for Environment and Energy

29 Questions?