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1、Part III Case Studies Case III.1Rolls-Royce Limited Rolls-Royce Limited, the British aeroengine manufacturer, suffered a loss of 58 million in 1979 on worldwide sales of 848 million. The companys annual report for 1979 (page 4) blamed the loss on the dramatic revaluation of the pound sterling agains
2、t the dollar, from 1 ? $1.71 in early 1977 to 1 ? $2.12 by the end of 1979. The most important reason for the loss was the effect of the continued weakness of the U.S. dollar against sterling. The large civil engines that Rolls-Royce produces are sup- plied to American air frames. Because of U.S. do
3、minance in civil aviation, both as producer and customer, these engines are usually priced in U.S. dollars and escalated accordingly to U.S. indices A closer look at Rolls-Royces competitive position in the global market for jet engines reveals the sources of its dollar exposure. For the previous se
4、veral years Rolls-Royces export sales had accounted for a stable 40% of total sales and had been directed at the U.S. market. This market is dominated by two U.S. competi- tors, Pratt and Whitney Aircraft Group (United Technologies) and General Electrics aerospace division. As the clients of its mai
5、nstay engine, the RB 211, were U.S. aircraft manufacturers (Boeings 747SP and 747,00 and Lockheeds L1011), Rolls-Royce had little choice in the cur- rency denomination of its export sales but to use the dollar. Indeed, Rolls-Royce won some huge engine contracts in 1978 and 1979 that were fixed in do
6、llar terms. Rolls-Royces operating costs, on the other hand, were almost exclusively incurred in sterling (wages, components, and debt servicing). These contracts were mostly pegged to an exchange rate of about $1.80 for the pound, and Rolls-Royce officials, in fact, expected the pound to fall furth
7、er to $1.65. Hence, they didnt cover their dollar exposures. If the officials were correct, and the dollar strengthened, Rolls-Royce would enjoy windfall profits. When the dollar weakened instead, the combined effect of fixed dollar revenues and sterling costs resulted in foreign exchange losses in
8、1979 on its U.S. engine contracts that were estimated by the Wall Street Journal (March 11, 1980, p. 6) to be equivalent to as much as $200 million. Moreover, according to that same Wall Street Journal article, “the more engines produced and sold under the previously negotiated contracts, the greate
9、r Rolls-Royces losses will be.” Questions 1.Describe the factors you would need to know to assess the economic impact on Rolls-Royce of the change in the dollar: sterling exchange rate. Does infl ation affect Rolls-Royces exposure? 2.Given these factors, how would you calculate Rolls-Royces economic
10、 exposure? 3.Suppose Rolls-Royce had hedged its dollar con- tracts. Would it now be facing any economic exposure? How about infl ation risk? 4. What alternative fi nancial management strate- gies might Rolls-Royce have followed that would have reduced or eliminated its economic exposure on the U.S.
11、engine contracts? 5. What nonfi nancial tactics might Rolls-Royce now initiate to reduce its exposure on the remaining engines to be supplied under the contracts? On future business (e.g., diver- sifi cation of export sales)? 417 41504_Pt3_Case_Studies_p417-420 3/5/02 7:27 PM Page 417 418Part IIICas
12、e Studies Case III.2The Mexican Peso The basic purpose of this case is to have you conduct an in-depth analysis of government macroeconomic policies on fi rms and banks doing business with Mexico. The vehicle being used is the Mexican peso. See Exhibit III 2.1 for statistics related to exchange rate
13、s and price indexes in the United States and Mexico for the period 19761997. Using these data, please address the following questions. Questions 1.What are the causes of the continuing devalua- tion of the peso since August 1976? Analyze both the immediate causes (e.g., balance-of- payments defi cit
14、s) and longer-term, more fun- damental causes (e.g., infl ation, the political and economic environment). Concentrate espe- cially on the 1982 and 19941995 devalua- tions of the peso. 2.What role did oil price changes play in Mexicos diffi culties? 3.What indicators of peso devaluation prior to 1982
15、 and 1994 were there? 4.What were the likely effects of the peso deval- uation between 1976 and January 1982 on a. Mexican companies? b. Foreign fi rms operating in Mexico? c.U.S. companies in border towns catering to Mexicans? 5.Redo question 4, focusing on the effects of peso devaluation subsequen
16、t to February 1982 and prior to December 1994. 6.In August 1982, the Mexican government devalued the peso, froze all dollar accounts in Mexican banks, and imposed currency con- trols. What are the governments objectives? How did these actions affect the black market value of the peso? Why? 7.How did the Mexican governments expro- priation of Mexico City real estate, following the September 1985 earthquake, affect the value of the peso and why? 8.Consider the trust factor wit
