Instructions On Project Analysis Due July 29

Instructions on Project The project analysis is due July 29, Wednesday, 11:59pm (US EST). Each group needs to submit only one written copy of the project analysis using the Canvas’s Assignment...

The project analysis is due on July 29 at 11:59 pm US EST. Each group must submit one written report via Canvas, including all group members' names on the front page. Grading will follow the Rubrics posted in Canvas.

Groups will be formed by the professor within one week after these instructions are distributed, typically with four students per group. Students are responsible for coordinating efforts. Free-riders are not permitted; a majority vote can expel free-riders, who will then receive a zero grade.

The recommended report structure (not mandatory) is as follows, though creativity is encouraged:

• Part I: Introduction (background analysis)
• Part II: Models (valuation, pricing, exchange rate determination, exposure measurement)
• Part III: Results (empirical analysis and explanations)
• Part IV: Conclusions (main findings)
• Part V: Appendix (spreadsheets, tables, figures)
• Part VI: References (media, journals, articles)

The report should answer all five questions on page 2 of the instructions, based on provided assumptions and cash-flow structures on page 3. If additional assumptions are necessary, they must be explicitly stated. The analysis should be double-spaced with 11 or 12-point font, and contain between four and ten pages.

Paper For Above instruction

The analysis focuses on evaluating Jaguar plc's foreign exchange exposure and its impact on firm valuation, as well as suggesting risk management strategies. This comprehensive approach involves assessing the company's currency risks, valuation methods, exchange rate forecasts, and hedging techniques, providing insights into how FX fluctuations influence Jaguar's financial health and strategic decisions.

Jaguar plc, privatized by the British government in 1984, sold over 50% of its automobiles in the U.S., despite production remaining in the UK. This geographical sales distribution exposed Jaguar to significant currency risk, primarily involving the British pound (£) and the US dollar ($). As Jaguar's sales in the U.S. are substantial, fluctuations in exchange rates directly affect revenue, profitability, and overall valuation (Eiteman, Stonehill, & Moffett, 2016). The core of the analysis lies in understanding the nature of Jaguar’s exchange rate exposures, including transaction and economic exposures, and quantifying the potential impact of FX movements on Jaguar’s financial metrics.

Exchange rate exposures refer to the sensitivity of a company's cash flows and valuation to changes in currency prices (Shapiro, 2017). For Jaguar, transaction exposure arises from receivables and payables denominated in foreign currencies, especially the US dollar. Economic exposure, however, relates to the longer-term effect of exchange rate fluctuations on competitive positioning and future cash flows (Madura, 2015). Given Jaguar’s extensive U.S. sales and British manufacturing base, the firm faces both types of exposure. The sources of these exposures include sales revenue, costs incurred in foreign currencies, and local market pricing strategies (Eiteman et al., 2016).

To evaluate Jaguar's worth in sterling at the beginning of 1984, a discounted cash flow (DCF) model is employed, incorporating projected free cash flows based on assumptions about sales growth, costs, capital expenditure, and working capital needs. Using the provided assumptions—such as fixed costs of £11.5 million in 1984, adjusted for inflation, and revenues forecasted with a 12% growth rate—an initial valuation is calculated. The valuation integrates the discount rate of 18%, which reflects the firm's risk profile and inflation expectations, as well as terminal value calculations based on a steady growth assumption beyond 1984 (Petersen, 2018).

Forecasting future exchange rates involves applying purchasing power parity (PPP) principles and considering inflation differentials between the UK and the US. Specifically, the expected future $/£ rates are derived from the inflation rates (US at 3% annually; UK at 5%), with the assumption that the exchange rate moves proportionally to these inflation differentials (Coyle, 2019). For example, the rate in 1985 is estimated by adjusting the 1983 rate based on relative inflation, leading to projections for 1985 through 1989.

These exchange rate forecasts impact Jaguar’s pricing strategy and sales volume in the U.S. market. A depreciation of the dollar against the pound would make Jaguar’s U.S. cars cheaper for American consumers, potentially increasing sales volume, while an appreciation would have the opposite effect (Madura, 2015). Therefore, changes in FX rates can significantly influence revenues and market share, which are incorporated into the valuation models as sensitivity analyses.

As a security analyst tracking Jaguar’s stock, the valuation involves assessing how currency fluctuations influence the firm’s market value. A hypothetical 10% decline in the dollar’s real value reduces Jaguar’s stock price correspondingly, considering the FX exposure and the firm's earnings sensitivity (Shapiro, 2017). The volatility of FX rates gives rise to market value exposures and delta estimates, representing the sensitivity of firm value and cash flows to exchange rate movements (Eiteman et al., 2016). For the forecast period from 1985 to 1989, the FX rate sensitivities are modeled using the estimated beta and delta, capturing how shifts in dollar/sterling rates translate into changes in free cash flows (Madura, 2015).

Economic reasons for the size of this exposure include the degree of dependency on exports, the competitive environment, and the currency denomination of inputs and pricing. Since Jaguar’s U.S. revenue accounts for over half of its sales, any FX fluctuation substantially affects profitability. Furthermore, the firm’s operational strategy and cost structure, with costs largely in GBP while revenues are in USD, create a natural hedge to some extent but also expose it to residual risks (Petersen, 2018).

To manage this exposure, Jaguar could employ forward contracts to lock in exchange rates for upcoming transactions. By entering into forward FX contracts—covering receivables, payables, or derived exposure—Jaguar can mitigate short-term currency risk (Coyle, 2019). The appropriate positions would be long or short, depending on the exposure, with maturities aligned to expected receivables and payables, typically spanning 6 to 12 months (Shapiro, 2017). Such hedging ensures cash flow stability and shields the firm from adverse FX movements.

For a U.S.-based investor, the FX exposure is different. While UK investors are concerned about GBP fluctuations, US investors are exposed to USD fluctuations relative to the firm’s valuation. The delta of Jaguar's stock with respect to the $/£ rate depends on how FX movements translate into earnings and, subsequently, stock price changes (Eiteman et al., 2016). The exposure for dollar-based owners is often less significant than that for pound-based shareholders because the latter directly benefit or suffer from currency movements that influence local earnings and valuation (Madura, 2015).

In conclusion, Jaguar's currency exposure critically influences its valuation and strategic risk management. Quantitative assessment through models and qualitative insights into currency risk sources demonstrates the necessity of implementing hedging strategies such as forward contracts. Together, these approaches help stabilize cash flows, protect firm value, and provide a competitive edge in international markets, particularly in the context of exchange rate volatility driven by inflation differentials and macroeconomic factors.

References

• Coyle, J. J. (2019). The Global Logistics and Supply Chain Management. Routledge.
• Eiteman, D. K., Stonehill, A. I., & Moffett, M. H. (2016). Multinational Business Finance. Pearson.
• Madura, J. (2015). International Corporate Finance. South-Western College Pub.
• Petersen, P. (2018). Corporate Finance: Theory and Practice. McGraw-Hill Education.
• Shapiro, A. C. (2017). Multinational Financial Management. Wiley.