Stock Market Liberalization

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.

The biggest threat for the company can be the currency fluctuation, that means not stability in their profits , so as a result of fluctuation there can be the rising of interest rates and an increase of the company’s income.

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

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.

Open-ended questions such as these will generate energy in the class, though the instructor should take care to limit the amount of time spent in this phase of the class, since students will find it easy to offer observations about the firm’s apparent strategy and financial performance. By letting the students assess the problems of this company in a nondirective fashion, the instructor can gauge students’ abilities and build students’ “ownership” of the analysis. The next three questions are a directive approach to problem assessment and could supplement this question or be used in place of it.

Note: these questions are intended to help your analysis. However, your final solution to the case and recommendations to management should not necessarily be limited to the answers to these questions or the assumptions in the case. Students are expected to use their judgment and analyze the feasibility of the projected information provided in the case exhibits.

c. Exchange rate risks: significant portion of revenue stream born currency exchange risk (peso vs. USD) regardless of geographical and product diversification. These risks were absolutely external and thus could have been hardly mitigated.

Given the nature of its business, Jaguar is faced with three types of exchange rate exposure (1) Transaction, (2) Translation and (3) Economic . Transaction exposures arise whenever the firm commits (or is contractually obligated) to make or receive a payment at a future date denominated in a foreign currency. Translation exposures arise from accounting based changes in consolidated financial statements caused by a change in exchange rates. In this case we primarily focus on the Economic exposure -also known as Operating exposure or Competitive exposure- of Jaguar.

The instructor may vary the emphasis on different issues by altering the study questions and by the choice of video clips. The case is well suited for courses and classes concerning corporate governance, valuation, mergers and acquisitions, and corporate social responsibility. The following objectives of the case allow students to:

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

3) What goal would you recommend for the firm’s currency risk management program? Why? Based on your goal, what types of exposure should Aspen be measuring?

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

For this part, I will used Dividend Valuation Model to estimate a fair value of Tesco’s Equity. This is because Tesco is supposed to pay out dividend every year, all things being equal. I will therefore adopt three assumptions from the study guides;

My evaluation is most sensitive with the free cash flow, because they have major change in free cash flow in 1999 to 1990 of minus 190 million pounds. Even after 4 years they have the first positive cash flow. Jaguar real value implies the assumption of Exhibit 7 as 1.7 billion. However the plan they have of tripling their assumption is more than optimistic, because is hard to triple their assumption more than 3 years, because of current situation they are on the market. With the little less optimistic scenario their value will drop on 1.5 billion pounds which will maybe give us the real value of the company, if things turn out as planned. However if their plan really works the real value with the included goodwill be 2 billion pounds. It is just an estimate.

In the literature we identify three types of exposure under floating exchange rate system; economic, translation and transaction. Translation and transaction exposure are accounting based and explained in terms of the book values of assets and liabilities denominate in foreign currency value. Economic exposure is the sensitivity of company value to exchange rate fluctuation. At the corporate level, changes in