Answer 1: A higher worth currency does make the exports of a country more expensive and makes the import cheaper in the domestic markets. Similarly, a lower worth currency makes the exports of a country cheaper and makes its imports more expensive in the domestic markets. Here the domestic currency is the British pound and the foreign currency is the USD. The large civil engine contracts were set and fixed in US dollar terms and conditions. If the dollars gets strengthened, Rolls Royce will be going to enjoy windfall profits and a lower exchange rate will be leading to a loss.
Exchange rates, inflation as well as interest rates are strongly correlated. So, the factors which assess the economic impact on the Company (Rolls Royce) of the change …show more content…
Transaction Exposure: Transaction exposure arises from exchange losses or gains in foreign currency denominated contractual deals. With the change in exchange rates lead to currency gains and losses. The company contracts were set and fixed in terms US dollars. However, the operating costs of the company were all incurred in terms of sterling. So, a question about the exchange rate arises.
Operating Exposure: Operating exposure emerges because currency fluctuations can change a company’s future costs and revenue as well as its operating cash flows. Currency value is affected by inflation so Rolls Royce’s costs and revenues will surely be affected. Considering this case, The Company’s operating costs were hugely incurred in sterling. Taking future into consideration, Rolls Royce’s operating costs will be gradually rising if the inflation is increasing. This kind of situation is not at all good for the company’s development. Therefore, The Company’s operating exposure gets affected by …show more content…
The two US competitors, Pratt & Whitney Aircraft Group and General Electric’s aerospace division, dominates this market. Rolls Royce will be having less competitive advantage or edge if the selling price of engines is more or less similar to two US competitors. The revenue of the Company will fall if the British pound gets strengthened and become more valuable because the company’s operating costs are measured or calculated in British pound. In this kind of situation, if the company decides to increase the selling price of engines then the company will lose its competitive advantage or edge and if the company decides to maintain the price then it will be incurring
Exchange rates, inflation as well as interest rates are strongly correlated. So, the factors which assess the economic impact on the Company (Rolls Royce) of the change …show more content…
Transaction Exposure: Transaction exposure arises from exchange losses or gains in foreign currency denominated contractual deals. With the change in exchange rates lead to currency gains and losses. The company contracts were set and fixed in terms US dollars. However, the operating costs of the company were all incurred in terms of sterling. So, a question about the exchange rate arises.
Operating Exposure: Operating exposure emerges because currency fluctuations can change a company’s future costs and revenue as well as its operating cash flows. Currency value is affected by inflation so Rolls Royce’s costs and revenues will surely be affected. Considering this case, The Company’s operating costs were hugely incurred in sterling. Taking future into consideration, Rolls Royce’s operating costs will be gradually rising if the inflation is increasing. This kind of situation is not at all good for the company’s development. Therefore, The Company’s operating exposure gets affected by …show more content…
The two US competitors, Pratt & Whitney Aircraft Group and General Electric’s aerospace division, dominates this market. Rolls Royce will be having less competitive advantage or edge if the selling price of engines is more or less similar to two US competitors. The revenue of the Company will fall if the British pound gets strengthened and become more valuable because the company’s operating costs are measured or calculated in British pound. In this kind of situation, if the company decides to increase the selling price of engines then the company will lose its competitive advantage or edge and if the company decides to maintain the price then it will be incurring