Jaguar Plc Case Study Solution
Exposure of Jaguar to $:
Jaguar is expose to the fluctuation in the value of $, as the profits and sales of Jaguar largely depends on the cash flows, that are generated from the United States.It can be said that slight fluctuation in the value of the US$ could have a great impact on the cash flows of Jaguar. The impact can be negative as well as positive.However, the chances of impact being negative are way too high, due to the continuous depression and worsening of the US$.
As happen in the recent past, the U.S. economy faces great recession and the stock market has been crashed.These difficult trading condition impacted the demand of the cars of Jaguar, which ultimately results in the losses being made by the Jaguar. Moreover, fluctuations in the U.S. currency might also have an impact on the valuation of Jaguar, as the buyer of Jaguar might also pay in the US$, if the US$ depreciates at that time, it will also cause some serious losses for the shareholders of Jaguar.
The case study scenario clearly mentions that almost 54% of the sales comes from the U.S. which expose Jaguar to $, furthermore, it can be assumed that, many of the materials which Jaguar uses in the manufacturing of the cars have been purchased from the U.S. markets.
How much Jaguar should Hedge:
From the year 1990 to 1995 Jaguar should have to manage all the sales revenue, which it expects to generates from the U.S. market. As per the financial projections Jaguar should have to manage $850 million in the year 1990, $1077 million in the year 1991, $1364 million in 1992, $1728 in the year 1993, $2188 in the year 1994 and $2774 in the year 1995. Furthermore, all the payments which have to be made in the $ should also have to be hedged, however, Jaguar should have to hedge the $ payments.Where the U.S. currency is likely to be strong, if the $ are expected to be week, Jaguar should not have to hedge the payments because it can give benefit to them.
If Ford Acquires Jaguar:
Which Exchange rate is Jaguar Exposed?
From the perspective of the U.S. based shareholders of Ford, it can be said that Jaguar will be exposed to the exchange rates of all the countries.Where they will sell their cars except for the United States. Furthermore, the shareholders will also be exposed to the exchanges rates of all the countries from where they purchase the materials which will be used in the cars of Jaguar. On the other hand, the competition from the Germany based competitors is increasing, it can be argued that Jaguar is also exposed to the D.M. It is because slight fluctuations in the D.M could have a negative or positive impact on the financial results of the Jaguar.
Sources of Exposure:
As now the parent company and shareholders will be in the U.S. and the production plant is in the U.K. it can be said that the sources of the exchange rate risks are the expenses that will be incurred in the U.K. At the time of translation if the value of the currency of U.K increases the costs in the $ will also be increased. Furthermore, sales revenue from outside the U.S. is also a source of exchange rate risk as well.
Exposure Ford should care about:
Ford should have to care about all the exposures, because of the impact and effects of the exchange rate risks on the financial results of Jaguar and Ford. If Ford not cares about the exchange rate risks it is highly likely that they have to bear substantial losses, which will ultimately results in the reduction of share price.
Ford should hedge the payments that have to be made in other currencies and receipts that will be received in currencies other than $. Failure to hedge the foreign receipts and payments might have an adverse consequences on the financial statements of the Jaguar and Ford. Now a days almost all the organization are focusing excessively on the hedging instruments, in order to reduce the exchange rate risk. It is because of their ability to impact the profits of the organization…………………
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