Project

Jaguar Cars♣

A Case on Foreign Exchange Exposure

Jaguar, a luxury UK car manufacturer, is exposed to exchange rate fluctuations since a large proportion of its sales are in dollars whilst its costs are in sterling and Deutschmarks. This case raises some interesting issue regarding the rationale for hedging foreign exchange exposure within an internationally competitive environment. From 1979 to 1981 Jaguar Cars lost ₤120 million. The cars that the company produced at the time were unreliable and badly finished. In addition, the strength of sterling, at an average rate of $2.33 in 1980, was given as another explanation for the losses. The variability of exchange rates has caused great concern in Jaguar, since a large proportion of their revenues comes from overseas, mainly in the USA, while most of the company’s raw materials and components are bought in the UK. The Company and its History In 1922, William Walmsley and William Lyons formed the Swallow Sidecar company to build motorcycle sidecars. In 1935 the company was floated on the stock exchange and in March 1945 it changed its name to Jaguar cars. The company produced a series of successful sports cars. In 1960 Jaguar doubled its capacity by purchasing Daimler company. Jaguar, however, was still small compared with its European and American competitors. This put the company at a disadvantage in terms of development and distribution costs. In 1966 Jaguar cars merged with the British Motor Company to form British Motor Holdings, and in 1968 BMLC was formed from a merger of BMH and British Leyland. In 1980 John Egan was appointed chief executive of Jaguar. Bill Hayden from Ford later described the progress of Jaguar in the 1980’s as follows: In 1980 Jaguar was on its knees. What few cars it made were of appalling quality and the government was about to turn the lights out. John Egan has more than trebled production over the past 10 years, introduced a new saloon and still managed to invest half a billion dollars...