The forward contracts enable the company to specify the fixed exchange which it will be willing to buy the foreign currency. This practice allows the organization to reduce the element of uncertainty regarding future cash flows. In this analysis, we are going to analyze Jaguar plc, which operates in the United Kingdom but sales over 50% of its products in the United States. As a result, in this analysis, we are going to take the case study of Jaguar plc and analyze various aspects. We are going to discuss on different exposures Jaguar is facing, the value of the company, the effect of dollar depreciation on the value of the corporate, and ways to manage the risk using the forward contract.
To evaluate the firm adequately, analysts use various models. One of them is the discounted cash flow model and the other being the present value model. The discounted cash flow is used to determine the value of the firm in the future, while the present value model is used to give the current value of the company using future cash flows. Apart from valuation mo...
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... is due to many economic disparities that exist between the two countries. For example, both countries are operating under different rates of inflation. The rate of inflation in the UK is 5% while in the United States is 3%.
Jaguar is facing different exposures, particularly transaction exposure to various currencies such as USD and DM. Exposures to these currencies especially USD, where over 50% of its revenues come from, can be reduced by using forward contracts. There is a direct relationship between the rate of exchange and the price and quantity of demanded products. There is a difference between the value of exposure for a U.S and UK-based investor since the two countries are operating under distinct inflation rates.
Gans, J., King, S., Stonecash, R. E., Libich, J., & Mankiw, N. G. (2008). Principles of economics.
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