Jaguar (Ford Takeover)
1. USD - The currency Jaguar is most exposed to has been the US Dollar (USD). Appendix item 1 shows that Jaguar historically (1984-1989) has a large proportion of retail vehicle unit sales and thus turnover generated from the United States.
CAD and DM -To a much lesser extent, Jaguar has also had revenues driven from sales into Canada (5-7% of revenues) and Europe (6-14% of revenues), although it is not clear from case data to which Euopean country the Jaguars have been exported. NB. This is pre-Euro time.
DM (indirect via competitors) –Historically, Jaguars competitors in the US luxury car market have been the German’s Porsche, BMW, Merc Benz. Thus the DM exchange rate risk is to Jaguar is that the USD appreciates more (depreciates less) vs DM than it does vs GBP. In that case, the German car manufacturers may be able to steal market share from Jaguar with negative implications for Jaguar’s earnings, cashflow, valuation.
Source of the USD historic exposure - Since Jaguar has costs in the UK (GBP) but sells cars abroad in USD (and to lesser extent CAD, DM etc), the exposure Jaguar faces is that GBP appreciates relative to these currencies. In that case, Jaguar (if not hedged for such a move) will likely experience a revenue fall. Depending on the strategy implemented by Jaguar in such a situation, this revenue fall would be driven by two processes. * The exchange rate change leads to an increase in Jaguar car unit price in USD and thus lowered demand from US consumers. US earned revenue falls. GBP revenues (once the US revenue has been converted back into GBP) also fall. * Jaguar does not pass on the price increase to US consumers and thus US earned revenues is not impacted by the exchange rate move. However these USD are worth less in GBP.
From the case, we know Jaguar (between 84 and 87) entered into forward transactions to hedge 50-75% of the next 12 months USD receipts. Thus I believe that that Jaguar’s strategy was to try to maintain the USD
CAD and DM -To a much lesser extent, Jaguar has also had revenues driven from sales into Canada (5-7% of revenues) and Europe (6-14% of revenues), although it is not clear from case data to which Euopean country the Jaguars have been exported. NB. This is pre-Euro time.
DM (indirect via competitors) –Historically, Jaguars competitors in the US luxury car market have been the German’s Porsche, BMW, Merc Benz. Thus the DM exchange rate risk is to Jaguar is that the USD appreciates more (depreciates less) vs DM than it does vs GBP. In that case, the German car manufacturers may be able to steal market share from Jaguar with negative implications for Jaguar’s earnings, cashflow, valuation.
Source of the USD historic exposure - Since Jaguar has costs in the UK (GBP) but sells cars abroad in USD (and to lesser extent CAD, DM etc), the exposure Jaguar faces is that GBP appreciates relative to these currencies. In that case, Jaguar (if not hedged for such a move) will likely experience a revenue fall. Depending on the strategy implemented by Jaguar in such a situation, this revenue fall would be driven by two processes. * The exchange rate change leads to an increase in Jaguar car unit price in USD and thus lowered demand from US consumers. US earned revenue falls. GBP revenues (once the US revenue has been converted back into GBP) also fall. * Jaguar does not pass on the price increase to US consumers and thus US earned revenues is not impacted by the exchange rate move. However these USD are worth less in GBP.
From the case, we know Jaguar (between 84 and 87) entered into forward transactions to hedge 50-75% of the next 12 months USD receipts. Thus I believe that that Jaguar’s strategy was to try to maintain the USD