Jaguar has full manufacturing costs of their Sminustype sedan of pound22,803. They sell the Sminustype in the UK with a 20% margin for a price of pound27,363. Today these cars are available in the US for $55,000 which is the UK price multiplied by the current exchange rate of $2.01/pound. Jaguar has committed to keeping the US price at $55,000 for the next six months. If the UK pound appreciates against the USD to an exchange rate of $2.15/pound, and Jaguar has not hedged against currency changes, what is the amount the company will receive in pounds at the new exchange rate?

Explanation:

Old Price        27363

Exchange Rate2.01

USD Value        55000

the company has committed to sale at $55000 existing price for next six months.

No currency hedge contract has been made by jaguar, in such case due to appreciation of pound the value of dollar will decrease but due to commitment by jaguar not to fluctuate the cost the total amount receivable in pounds will decrease as compared to 6 months before

USD Value         55000

Exchange Rate  2.15

Price in Pounds      25581

Decrease in pounds = 27363-25581 = 1782 loss

25581.40 Pounds

Explanation:

in this problem we firstly evaluate if the $55000 does include the margin of 20% for the old exchange rate which is $2.01/ pound which we will say ($55000)/($2.01/ pound) = 27363 Pounds therefore it is already adjusted to margin percentage then when we now calculate the new amount the company will receive with the new exchange rate taking place we will calculate also by dividing the dollar price of the jaguar by the new exchange rate of the dollar to the pound in order to find out the new pound price of the jaguar model. As we are told in this statement that for the next six months the jaguar will remain $55000 so we know that its dollar price will not change as jaguar has not hedged against currency changes therefore the UK price will be $55000/($2.15/pound) = 25581.40 Pounds as we see in this problem that the pound has really appreciated to the dollar because the UK price of the jaguar has dropped from 27363 Pounds to 25581.40 pounds.

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