Question

Instructions for Case “Jaguar plc, 1984”** In July 1984, the British Government decided to privatize Jaguar plc. Jaguar sold over 50 % of its cars in the United States, but its production was confined to Britain, so it was subject to considerable exchange rate exposure. Your task is to take into account the exposure in pricing the shares of Jaguar and value how much the firm is worth under several exchange rate scenarios. Below is a list of questions you must address in your case analysis. For each answer, be sure to attach spreadsheets showing how you obtained the answer and describe any relevant calculations in your write-up. Be sure to be as clear and concise as possible. 1) Discuss about Jaguar’s exchange rate exposures. To which currencies is Jaguar exposed? What are the sources of these exposures?

Answer 1

1 a) To which currency is jaguar exposed:

Jaguar is exposed to US $. This is because it has sales in United States. It is also exposed to DM this is because it is in competition with Benz & Porsche. The other chance of right answer can also be yen as it also competes with Japanese cars that are high priced. Examples are Lexus, infinity and Acura which were introduced in mid 1980 though it has no relevance in this case.

b) Sources of the exposure

The exposure to US$ for jaguar comes by way of exports sales to United States. Since production for jaguar is in UK, there are no dollar expenditures. However some percentage of production costs are for materials and energy costs are US based, but the net asset position for jaguar is in dollar because of US sales and $ cash flows.

The exposure to DM comes through competition with two German car makers namely Benz and Porsche. When the DM is weak, it permits the German car makers to lower their dollar prices keeping their dollar margin profits intact. From this it can be assumed that dollar and the pound rate remains constant so that jaguar can’t play the same pricing game in US. Hence the US market for jaguar is at risk because of German competition when DME rises.