Jaguar Plc, 1984 - 1911 Words

Executive Summary: Jaguar PLC, 1984 This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged. While the current trend in the USD has been higher, the markets are expecting a pullback in the currency. With labor accounting for a significant portion of the cost base for luxury car industry, it is unlikely that the expense will decline in the near future. Again this creates a potential liability in the matching†¦show more content†¦Jaguar has performed extremely well in the U.S. market, thanks in large part to the substantial real appreciation of the U.S. dollar against all European currencies. Previously, the strong dollar gave Jaguar the opportunity to cut its prices, however, given the fact that luxury cars are not price sensitive it had not done so (nor had its competition). If Jaguar were to increase prices of cars in the US (to keep profit margins constant at the pre-U.S. dollar depreciation level), demand would drop and they would sell fewer cars. If they keep prices the same (in US$), profit margins would be squeezed, and hence possibly the company s share price as well. Sources of Exchange Rate Exposure Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar. Economic exposure is the change in expected cash flows arising because of an unexpected change in exchange rates. Aside from existing obligations of the firm which will be settled in foreign currencies atShow MoreRelatedEssay Jaguar PLC, 19841837 Words   |  8 Pages Executive Summary: Jaguar PLC, 1984 This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged. 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