Rolls-Royce and Aston Martin

Introduction

Rolls-Royce is a multinational firm with headquarters in the United Kingdom and operations in several other countries. Rolls-Royce is a leading manufacturer of aircraft engines. The company, which has its headquarters in London’s City of Westminster, is involved in designing and producing aircraft engines. It was founded in 1903. It also serves as a distributor of electricity distribution networks. Rolls-Royce is the world’s third-largest aircraft manufacturer, after only Boeing and Airbus.

Anglo-Dutch premium sports vehicle manufacturer Aston Martin Lagonda is situated in the United Kingdom and is fully independent of the motor industry. Lionel Martin and Robert Bamford founded the company in 1913, which served as the predecessor to the current one. Their sports cars are recognized as cultural monuments in the United Kingdom. In addition to having over 160 car dealerships in 53 countries, Aston Martin is a vendor of automobiles recognized by the British government as holding a Royal warrant. As a result, it has evolved as a truly worldwide automobile brand. The company, which was awarded the Queen’s Award for Enterprise in recognition of its excellent contribution to international trade in the previous year, is publicly traded on the London Stock Exchange and is a member of the European Union.

This essay aims to explain what currency risk is and identify the foreign currency exposures (i.e., currency risk) that the Rolls-Royce and Aston Martin vehicle firms are exposed to. Rolls Royce and Aston Martin’s hedging plans are also featured, as are recommendations to these corporations on selecting the most successful hedging techniques for managing their currency risk.

Currency Risk

According to Hassan, (2021), currency risk, also known as exchange rate risk, is the risk that investors or businesses operating in multiple countries face in terms of unanticipated gains or losses as a result of fluctuations in the value of one currency relative to another’s currency as a result of fluctuations in the value of one currency relative to another’s currency. Foreign exchange risk can be divided into three categories: transactional risk, macroeconomic risk, and translational risk. Transactional risk is the most common type of risk.

Transaction risk is a firm’s risk while doing financial transactions in various jurisdictions. The volatility in the currency rate before the transaction settlement represents the risk. Transaction risk is primarily caused by the amount of time that has transpired between the time of the transaction and the time of settlement. An organization’s market value may be adversely affected by the inevitable exposure to currency changes, which is the subject of the second type of risk, referred to as economic risk. Global macroeconomic factors such as geopolitical instability and government regulation are often responsible for generating this sort of risk. Finally, translation risk refers to the risk encountered by a company that has its headquarters in one country but conducts business in another. Its financial success is assessed in the country’s currency in which the corporation is headquartered. When a company has a greater proportion of its assets, liabilities, or equity held in a foreign currency than in its home currency, currency translation risk increases Chand et al. (2021).

Rolls Royce is headquartered in the United Kingdom, but the vast bulk of its sales is made in the United States, which exposes the company to transaction risk. The pound sterling is the currency of the United Kingdom, while the US dollar is the currency of the United States, according to the Annual Report 2021 (n.d.). Profits earned by the corporation are given in pound sterling (GBP) units. As a result, if the value of the United States dollar falls, the company’s profitability will suffer. If the value of the US Dollar drops, the firm will be exposed. Important factors for the organization include the currencies that its clients use and the rate of inflation in those currencies. Inflation impacts both Rolls Royce’s exposure to the market and its profitability.

According to the (Annual Report | Aston Martin Lagonda, 2018), fluctuations in market pricing, such as those impacting foreign currency exchange rates, agricultural commodity prices, and interest rates, expose Aston Martin Lagonda to potential risks. As a result of its global operations, Aston Martin Lagonda generates a significant portion of its revenue and expenses in currencies other than the pound sterling, primarily in the United States dollar and the euro (euro). As a result, Aston Martin Lagonda incurs expenses in various currencies, primarily the euro, which is the currency in which the business purchases engines from Daimler and Ford, among other suppliers.

Hedging Techniques

Hedging is a financial technique that offers several advantages and should be understood and implemented by investors because of its advantages. Investments, in particular, shield an individual’s money against exposure to a potentially hazardous situation that could result in a loss of value in the future. However, hedging does not always indicate that the investments will not lose any value. Instead, if this occurs, the losses will be offset by gains from another investment, which will offset the losses. Hedging is the process of identifying the risks connected with a certain investment and deciding to safeguard one’s financial condition from any bad event that could have a negative impact on it.

Rolls–Royce sustained losses due to the dollar contracts, which were the cause of those losses (Annual Report 2021, n.d.). These contracts were tied to a specific sum of money. Alternatively, the operating expenses of the contracts were calculated in British pounds sterling. As a result, there were significant disparities in the way the profits of the corporation were computed. Because the discrepancies in currency rates were not foreseen, it is possible that the firm diversified its portfolio to limit the risks connected with them. Even though there may still be an economic exposure, the risk may be minimized to a lower level. Inflation would continue to be a threat to the firm. However, the returns from the companion investments may be adequate to compensate for the losses. To restrict its economic exposure to the marketplace, the firm may use one of four important financial strategies. Derivatives include forward contracts, options, money market hedges, and future contracts, to name a few.

In an attempt to manage currency risk, Aston Martin Lagonda employs hedging techniques; nonetheless, there are risks associated with using these instruments. Aston Martin Lagonda’s exposure to currency exchange rate fluctuations may be mitigated to some extent through the use of hedging instruments (including the use of derivative financial instruments); however, it is possible that such hedging activities will be ineffective or that they will not offset more than a portion of the adverse financial impact resulting from fluctuations in such rates. Aston Martin Lagonda is also exposed to counterparty credit (or repayment) risk regarding counterparties to hedging contracts, which is a risk that the firm does not wish to incur (Annual Report | Aston Martin Lagonda, 2018).

Conclusion

Rolls-Royce is a multinational firm with headquarters in the United Kingdom and operations in several other countries. Rolls-Royce is a leading manufacturer of aircraft engines. Anglo-Dutch premium sports vehicle manufacturer Aston Martin Lagonda is situated in the United Kingdom and is fully independent of the motor industry. This essay aims to explain what currency risk is and to identify the foreign currency exposures that the Rolls-Royce and Aston Martin automobile firms are subject to. Luxury automotive manufacturers Rolls-Royce and Aston Martin are both located in England. Transactional risk refers to the fluctuation in the exchange rate that happens before the settlement of a transaction. Economic risk refers to the possibility that an organization’s market value will be negatively impacted as a result of the firm’s inevitability of being exposed to currency swings. When a company has a greater proportion of its assets, liabilities, or equity held in a foreign currency than in its home currency, currency translation risks. Aston Martin Lagonda is exposed to the risk of financial loss due to changes in market prices, such as fluctuations in foreign currency exchange rates and fluctuations in commodity prices. Hedging is the process of identifying the risks connected with a certain investment and deciding to safeguard one’s financial condition from any bad event that could have a negative impact on it. Investments, in particular, shield an individual’s money against exposure to a potentially hazardous situation that could result in a loss of value in the future. Even if you hedge your investments, there is no guarantee that they will hold their value eternally. Instead, if this occurs, the losses will be offset by gains from another investment, which will offset the losses.

References

Annual Report | Aston Martin Lagonda. (2018). Astonmartinlagonda.com. https://www.astonmartinlagonda.com/investors/annual-report

Annual Report 2021. (n.d.). Www.rolls-Royce.com. Retrieved March 22, 2022, from https://www.rolls-royce.com/investors/annual-report-2021.aspx

Chand, D., & Agarwal, V. (2021). Sustainable Currency Derivative Framework for Effective Risk Management of Indian Corporates. PURUSHARTHA-A journal of Management, Ethics, and Spirituality, 14(1), 73-87.

Hassan, T. A., & Zhang, T. (2021). The economics of currency risk. Annual Review of Economics, 13, 281-307.

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