Manufacturing takes place in Coventry, England but exports about 75% of its vehicles. In 1984, the U.S. was the world’s largest market for automobiles costing $30,000 or more and Jaguar sold 54% of its cars to that market. Due to the large quantity of exported cars, Jaguar exposes itself to operational, transactional, and translational risk. The dollar-sterling exchange rate has changed from $2.39 per BP in 1981 to $1.35 per BP currently, which in turn has resulted in the opinion that the dollar is overvalued compared to other currencies and will continue to depreciate.
Based on the expectation that the value of the dollar will continue to decline, Jaguar is facing too much operational risk. As the sterling is undervalued by 36.42%, compared to 11.94% three years ago, Jaguar is realizing higher than expected profit margins. The luxury car market is not price sensitive in comparison to the rest of the automobile market and therefore Jaguar did not feel it necessary to lower its U.S. prices. However, in relation to its competition, if Jaguar were to increase its prices in the U.S., the demand for their cars would drop and they would lose market share.
Since the German DM is less undervalued than the British Pound, they will be less affected by the depreciation of the dollar. In order to protect against the depreciation of the dollar it is in Jaguar’s best interest to locate manufacturing facilities in the U.S. This would reduce the operating exposure, as... [continues]
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