exchange rate. How large is it compared to Jaguar’s sales?
Assets? Equity value?
In 1984, Jaguar’s had assets of £249.5(£119.0 in fixed assets and
£130.5 in current assets). Jaguar had £125 in equity. For the
calendar year of 1983, Jaguar had sales of £472.6. In the first quarter
of 1984, the revenue was £143.3. The Q1 sales annualized are
As previously discussed, the estimated exchange rate risk in 1984 is
£90. Based on the calculations in the table below, Jaguars’ exposure
to exchangerate risk is very large in comparison to their financials.
It will be approximately 16% of revenues in 1984. Based on the last
full year of revenue, it was 19%. Assuming it falls in this 16% to19%
range, this would be a very high risk for a company the size of Jaguar.
But sales should not be the only metric that should be used in this
analysis. The impact on the bottom line numberalso needs to be
considered. The first quarter net income in 1984 was £3.3, annualized
it would be £13.2. The estimated exchange rate risk could be five
times more than the estimated netincome. Based on the last full year
of data, the net income is £49.5, still less than the £90 of estimated
exchange rate risk.
Analyzing Jaguars’ exposure in comparison to the balance sheet, theestimated exchange rate risk is very large in comparison in both to
assets and to equity. Assets have been broken out to two types, fixed
and current. Fixed assets are not an appropriatemeasure, so it would
be a better measure to use just the current asset portion of assets.
The estimate exposure is 69% of the current assets.
The exposure to foreign exchange rate risk is also verylarge in
comparison to Jaguar’s equity. It is 72% of the equity of Jaguar.
4. Should Jaguar attempt to hedge its dollar exposure? Why or why not? What methods are available for hedging...