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Q: What is Jaguars market value exposure (and delta) with respect to the real dollar/sterling exchange rate? What is Jaguars free cash flow exposure (and delta) for the years 1985-1989 with respect to the real dollar/sterling exchange rate?

A: First, lets be clear about what is exposure. It is how home currency firm value change with respect to the 1% change of home/FX exchange rate. Thus, it is foreign currency unit. How do we estimate exposure? Well there is a distinction between the exposure of firm value and the exposure of equity value. The effect of a Jaguars rate exposure is essential and it a consequence of the failing of the dollar versus the tougher pound sterling. This volatility in the currency value and exchange rates that can cause negative effects on the companys cash flows. The companys economic exposure will definitely have an impact on its market value. Jaguar is at risk of losing it companys worth and net value. In the attached Exhibits 1-3 the growth rate in terms of the number of units that are sold in the US will reduce over time hence, the company will lost its value and investors desire to invest in the company. The dollar will not be desirable to when it is measured against other currencies such as the pound sterling. The pound sterling however will be more desirable and create higher demands for it. Consequently this could adversely impact the size of the exchange rate exposure since economic exposure is not easily hedged or controlled.

To calculate Jaguars market value exposure (and delta) the with respect to the real dollar/sterling exchange rate it is necessary to take on a single scenario and change the exchange rate by +1% and -1% for year 1985.

Take for instance, a permanent 10% depreciation in the real value of the dollar -assumes that Jaguar raises US prices by an extra 10% in 1985 and that U.S. sales grow at only 6% in 1985.This scenario assumes that Jaguar passes along some of the exchange rate change into its unit price per car (the price per car would increase). Therefore, the 1985 US sales price of $29,040 is 10% higher than in the base case. The price change causes will create a slight reduction in volume growth 1985 because demand will slightly reduce. With these changes, the impact on the valuation of Jaguar is still substantial, dropping the present value of free cash flows by nearly 50percent to 265million.

Formula:

Change in $/ rate Change in Jaguar Valuation: +1% depreciation of $ (1.324 to 1.337) -15,551,000

-1% appreciation of $ (1.324 to 1.311) +15,854,000