Jaguar Plc, 1984

This case shows us that apart from transaction, translation and economic exposure to currency risk, firms also have the very real strategic impact on their competitive position from competitive exposure. Apart from GM’s exposure to the yen which is reflected in their financial statements, their competitive position vis-à-vis Japanese manufacturers is affected by a potentially declining yen. This is because a declining yen reduces the Japanese manufacturers’ $ cost, enabling them to pass on some of the benefit to US customers and thus taking some of GM’s market share. This will impact GM’s top and bottom line. However, GM has a difficult decision regarding managing this risk.

General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import

There are lots of methods to solve the changes in foreign currency and interest rates issue, however, derivative financial instruments are the major tunes Nike enterprise has used to tackle this issue. Despite the fact that this approach does not wipe out comprehensively the risk of foreign exchange, Nike enterprise still utilize it to minimize or delay the negative consequences. Specifically, the derivative financial instruments comprise embedded derivatives, interest rate swap, and foreign exchange forwards and options contracts (Nike annual report, 2014).

To study this subject, the author used a questionnaire of MNCs, choosing the largest 600 questionnaires from the UK, USA, Australia, Hong Kong, Japan, Singapore and South Korea. A total of 179 usable responses were received and this was the basis of the paper. The questionnaire covered a number of different subjects, including the importance of foreign exchange rate risk management, the objectives of managing foreign exchange rate risk, the degree of emphasis on transaction risk, the degree of emphasis on translation risk, the degree of emphasis on economic risk, and whether the respondent manages translation risk internally. The questionnaire also sought to understand some of the techniques that firms in the different regions used, for example pricing strategy, operating hedges, and planning. Where economic risk was not managed, the author sought to find out why the company had chosen not to manage this type of risk.

This case explores the operating exposure of Jaguar PLC in 1984, just as the government is about to relinquish control and take the company public via an IPO. The primary concern of the CFO is that Jaguar sells over 50% of its cars in the US, while its production costs and factories are U.K.-based. This currency mismatch creates operating exposure for the firm that needs to be hedged.

Exhibit 7 from the case study describes the currency development in medium term of the GBP and EURO against the dollar. We can observe that the currencies are exposed to high volatility, which means the company may register greater risk

Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that

In the literature three types of exposure under floating exchange rate regimes are identified; economic, translation and transaction. Translation and transaction exposures are accounting based and defined in terms of the book values of assets and liabilities denominated in foreign currency. Economic exposure is

The US dollar has strengthened substantially over the last year when compared to other currencies. This causes US exports of vehicles and

Also there are risks and uncertainties associated with the company’s expansion into their operations in Asia, Latin America, Caribbean and other foreign markets could adversely affect their results of operations, cash flow, liquidity or financial condition. Fluctuations in foreign currency

Translation exposure is the effect of changes in exchange rates on the accounting values of financial statements (Shapiro, 2010, p.356). The translation exposure arises from the conversion the financial statements denominated in foreign currency from denominated in home currency. The MNCs could reduce their translation by using funds adjustment. For an example, if the devaluation of USD is expected for a Chinese company. The company could use direct funds adjustment such as pricing the exports in RMB and pricing the imports in USD, investing in RMB securities and replacing loans in RMB

What is exchange rate risk? An exchange rate risk refers to exchange rate fluctuations which can affect a firm’s profits and trade. For example, the euro exchange rate was $0.87 in 2002 but risen to $1.28 in 2012, so the cost in dollars increased by 47.1% over the 10 year period. This increase hurts the export of European products to the United States (Brigham & Ehrhardt, 2014). Also, the volatility of exchange rates incrases the uncertainty of the cash flows for a MNC. Because the cash flows are denominated in many different currencies, the dollar equivalent value of the company’s consoilidated cash flows also functuates (Brigham & Ehrhardt,

2. Rising raw material prices. Rising raw material prices increase so will the the price of the cars. The prices are important to manufactures because this means that they will need to increase the sales and so their profits will decrease.

There are three different foreign exchange risk categories: translation, transaction and economic exposure. Translation exposure is “is the impact of currency exchange rate changes on the reported financial statements of a company.” (Charles W. L. Hills, 2013) Translation is determined by evaluating pass events using present measurements that will produce an unrealized gain or loss. Translation exposure affects the consolidated balance sheet showing whether a company is more or less leverage, which can affect its borrowing capacities. Transaction exposure is when changes in exchange rate affect a contract already establish at one point in the past, in the future, making it less or more profitable. In other words, if a contract is in place,

1) Merton Electronics is subject to transaction exposure. Transaction exposure is the gains or losses realized from the settlement of specific transactions that are denominated in a foreign currency. There are two main types of transaction exposure: 1) Purchasing or selling on credit goods denominated in a foreign currency 2) Borrowing or lending funds when repayments is going to be made in foreign currency. In respects to Merton’s Yen payments they are subject to transaction exposure. Merton imports a majority of its products from Japan. This results in payments due to suppliers that are denominated in Yen. Merton has locked in outstanding transactions with Fuji and Goldstone that would be