International Financial Management

International Financial Management

Jaguar PLC, 1984

The main aim of this paper is to explore Jaguars (PLC) operating exposure in the year 1984 when the government was formulating strategies to surrender control of the company by privatizing it through an IPO. The main concern held by the incumbent CFO at Jaguar was that the company sold more than 50% of its manufactured automobile units in the markets of the United States even though its factories and production facilities were based in the UK. This clear mismatch in the currency creates operating exposure for the company so that there is a pressing need to hedge it (Reinhart, 2004).

Even though the US dollar has shown an upward trend recently, there is a high anticipation in the market of a strong pullback. In the case of the luxury car industry, a major portion of costs is related to labor. Hence, a fall in expenses is not likely in the near future. This ends up creating a possible liability in terms of matching cash outflows and cash inflows. Considering the fact that the main competitors of Jaguar have operating expenses mainly in DEM, competitive advantages closely linked with favorable exchange rates should also be a major concern for the CFO (Calvo, 2001).

Additionally, DEM/DEM exchange rate is another major issue that exists in this particular industry. Underlying issues and overarching themes that demand urgent attention for the purpose of the currency exposure of Jaguar are risks valuation that are closely linked to firms that face multiple currency exposure. Apart from this, risks related to expenses and revenue streams in different currencies, valuation/assessment if competitive segment luxury cars, effectiveness of labor and supply chain trends in the industry, and strategic positioning of operations are some other major concerns that businesses operating in the industry face. After adopting a quantitative and qualitative perspective to weigh identified issues, it becomes clear that Jaguar can adopt one of several strategies for maximizing profitability while also mitigating exposure to exchange rates for revenues generated through sales in American markets (Chowdhry, 1998).

In this regard, it is imperative that the management relocates a considerable number of its manufacturing operations and facilities to America. This will help to foster a significant decrease in operating exposure as costs and revenues would be denominated in the same currency. The treasury of Jaguar should encourage in Swap/Forward contracts for the purpose of selling US dollars. This will protect the company against possible currency fluctuations that may occur in the future. The treasury can also purchase call options on the Pound Sterling as this will hedge operating exposure. With an option of paying premium, Jaguar will be able to reserve several rights while also being protected from the liability of exercising options based strictly on unfavorable and favorable fluctuations in the currency exchange rates (Shapiro, 2005).

Question 2

The value of jaguar in pounds sterling in 1984 was £ 1.445million (Exhibit 7).

Forecast for 1985

The financial forecast for the pound sterling is based on the rate ...