Cover page

Student's Name
Institution Affiliation
Date
Table of content
Contents
Cover page...........................................................................................................................1
Table of content...................................................................................................................2
Introduction..........................................................................................................................3
Currency risk.......................................................................................................................3
hedging techniques..............................................................................................................5
Conclusion...........................................................................................................................6
References............................................................................................................................7
Appendix..............................................................................................................................8

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Introduction
Rolls-Royce is a British multinational corporation with operations in numerous other
nations. Rolls-Royce is a market leader in aviation engine manufacturing. The firm,
headquartered in the City of Westminster in London, develops and manufactures aircraft engines.
It was established in 1903. Additionally, it distributes electrical distribution networks. Rolls-
Royce is the third most prominent aircraft maker globally, after Boeing and Airbus.
Aston Martin Lagonda is a British-Dutch luxury sports car manufacturer based in the
United Kingdom. The company is entirely independent of the automotive industry. The firm was
created in 1913 by Lionel Martin and Robert Bamford and served as the forerunner of the present
one. In the United Kingdom, their sports vehicles are designated as cultural monuments. In
addition to having over 160 dealerships in 53 countries, Aston Martin is a seller of vehicles
recognized by the British government as possessing a Royal warrant. Consequently, it has grown
to become a genuinely global vehicle brand. The firm, which received the Queen's Award for
Enterprise last year for its outstanding contribution to worldwide commerce, is publicly listed on
the London Stock Exchange and is a member of the European Union.
Based in Welwyn Garden City, Hertfordshire, Tesco PLC is a British multinational
retailer of groceries and other goods. It operates shops in five European countries and is the
market leader in groceries in the United Kingdom, with a 28.4% market share. With a 16.0
percent market share, Sainsbury's is the second-largest grocery chain in the United Kingdom.
This article aims to define currency risk and determine the foreign currency exposures (i.e.,
currency risk) that Rolls-Royce and Aston Martin vehicle manufacturers and Tesco and
Sainsbury's supermarkets face. Rolls Royce and Aston Martin's hedging methods are also
highlighted, as is guidance to these corporations on choosing the most effective hedging options
for managing their currency risk.

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Currency Risk
Currency risk, often known as exchange rate risk, is the risk that investors or companies
operating across various jurisdictions face in terms of unexpected gains or losses owing to
changes in the value of one currency compared to another's currency. Foreign currency risk is
classified into three categories: transactional currency risk, macroeconomic risk, and translation
risk. Transaction risk is the most critical risk to consider in today's financial markets.
Transaction risk refers to a business's risk while doing financial transactions in several
nations. Currency rate volatility is a proxy for risk before transaction settlement. The time
interval between when a transaction is begun and when it is thoroughly settled accounts for most
transaction risk. An organization's market value may be lowered due to a company's inescapable
exposure to currency swings, which is the subject of the second kind of risk, referred to as
economic risk. This risk is often generated due to global macroeconomic challenges such as
geopolitical instability and government regulation. Finally, translation risk relates to the dangers
businesses face with headquarters in one nation but operations in another. Its financial
performance is reported in the nation's currency in which it is based, not in dollars. According to
Chand and colleagues, when a firm retains a more significant percentage of its assets, liabilities,
or equity in a foreign currency than in its native currency, the risk of currency translation rises
(2021). While Rolls Royce's headquarters are in the United Kingdom, the firm conducts most of
its business in the United States, exposing it to transaction risk. According to the Annual Report
2021, the United Kingdom's currency is the pound sterling, whereas the United States of
America's currency is the US dollar (n.d.). Throughout this article, the corporation's profits are
expressed in pound sterling (GBP) units. As a result, if the value of the US dollar declines, the
company's profitability will suffer. The corporation will be vulnerable if the value of the US
dollar drops. The currencies in which its consumers transact and the inflation rate in those
currencies are all critical factors for the firm to consider. Inflation has a detrimental effect on
Rolls Royce's market exposure and profitability.

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 Aston Martin Lagonda's annual report (2018) states that market pricing variations, such
as those affecting currency risk, agricultural commodity prices, and interest rates, expose the
company to potentially detrimental risks. Aston Martin Lagonda earns considerable income and
incurs high costs in currencies other than the pound sterling, most notably the US dollar and the
euro, due to its worldwide activities (euro). As a result, Aston Martin Lagonda incurs costs in
many currencies. Consequently, the euro is the corporation's primary currency of choice, as the
firm acquires engines from suppliers such as Daimler and Ford in this currency.
The Tesco plc Group's main financial risks include the money supply, interest and
exchange rate fluctuations, and credit risks associated with parties to financial transactions
defaulting. Purchase or sale of forwarding currency exposures and acquired currency options are
standard methods of hedging transactional currency risks. Cash flow hedges totaled £2.2 billion
at the end of the year. Inflation-adjusted Tesco Group profits are converted into local. According
to (Group, 2021), to ensure that non-functional currency assets are sufficiently hedged, the firm
hedges just a percentage of its foreign subsidiaries' investments. As a result of currency
fluctuations, the Group's foreign assets gained £5 million in value during the year (up from a loss
of £1.102 million). Exchange rate fluctuations that affect a company's foreign currency supply
contracts may increase expenditures. Sainsbury needs hedges to mitigate the effect on the income
statement of highly likely foreign currency cash flows. Forward contracts in foreign currencies
hedge highly speculative future cash flows.

Hedging techniques
Hedging is a financial method that offers several advantages, and investors should be
aware of and use it. Specialized investments safeguard an individual's money from exposure to a
potentially risky scenario that might cause the value of the funds to deteriorate or disappear
entirely. On the other hand, hedges do not guarantee that assets will perpetuate their value.
Rather than that, if this happens, the losses will be somewhat offset by profits from another
investment. In finance, hedge accounting refers to identifying the risks connected with specific
assets and determining how to safeguard one's financial condition from any unexpected event
that might adversely affect it.

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 Currency risk is a transactional risk that Tesco, Rolls Royce, Sainsbury, and Aston
Martin face. The danger of a currency exchange rate fluctuating between the transaction date and
the following settlement date is transaction risk (Chapter 13: Hedging Foreign Exchange Risk,
2021). This form of risk is most prevalent in the context of imports and exports. If a business
exports product on credit, it must account for debtors. The ultimate amount it receives is
determined by the foreign currency rate fluctuation between the transaction and settlement dates.
Due to the potential effect of transaction risk on a company's cash flows, most businesses opt to
hedge against such exposure.
In most cases, measuring and monitoring transaction risk is a critical component of
treasury management. The degree of exposure is determined by the following factors: the amount
of the transaction, is it material? The hedging period is the time interval between the anticipated
cash flows and their occurrence. Exchange rate volatility is predicted throughout the hedging
period. The company risk management policy should specify the permissible level of exposure.
This will depend on whether the Treasury Department is set up as a cost or profit center.
Hedging transactions are often executed using derivatives such as options or futures contracts.
Still, they may also be implemented using inversely correlated assets and can take on various
forms. While they are often intended to restrict a position's losses if the original investment
thesis is wrong, they may also be used to lock in a particular amount of profit. Corporations and
portfolio managers frequently use them to reduce overall portfolio risk. Although the hedge is
often market-based, hedging activities may be associated with an investment or routine company
operations. A transaction using investment-based hedging may include the use of derivatives,
such as futures or forward contracts. The four businesses should use these hedging measures to
mitigate the currency risk.

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Conclusion

Rolls-Royce is a market leader in aviation engine manufacturing. Tesco is the world's

third-biggest retailer in terms of gross revenue. Sainsbury's is the United Kingdom's second-
biggest grocery chain. Rolls Royce and Aston Martin's hedging techniques are also covered, as
with advice on choosing the most effective hedging options for managing currency risk. Foreign
currency risk is classified into three categories: transactional, macroeconomic, and translation
risk. "transaction risk" refers to a business's risk while doing financial transactions in several
nations. Currency rate volatility is a proxy for risk before transaction settlement. Although Rolls
Royce is headquartered in the United Kingdom, it conducts most of its operations in the United
States. Inflation has a detrimental effect on Rolls Royce's market exposure and profitability.
Aston Martin Lagonda earns considerable income and incurs high costs in currencies other than
the pound sterling due to its worldwide activities. The euro is the corporation's primary currency
since it pays suppliers such as Daimler and Ford for engines. Tesco, Rolls Royce, Sainsbury's,
and Aston Martin experience transactional currency risk. The danger of an exchange rate
fluctuating between the transaction date and the later settlement date is transaction risk. This
form of risk is most prevalent in the context of imports and exports. Hedging does not
necessarily imply that assets will preserve their value in perpetuity. Rather than that, losses will
be partly offset by profits from another investment, covering the losses incurred.

References

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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.
Chapter 13: Hedging foreign exchange risk. (2021, June 11). Default.
https://kfknowledgebank.kaplan.co.uk/acca/chapter-13-hedging-foreign-exchange-risk
Group, A. (2021). Principal risks Risk movement Key controls and mitigating factors Data
security and privacy. https://www.tescoplc.com/media/1914/tescoar15_br_risks.pdf
Hassan, T. A., & Zhang, T. (2021). The economics of currency risk. Annual Review of
Economics, 13, 281-307.
Appendix

C ind Weblink of company annual Company

ompany ustry reports website
name
R Au https://www.rolls- https://
olls tomobile royce.com/investors/annual-report- www.rolls-
Royce 2021.aspx roycemotorcars.com/

A Au https:// https://
ston tomobile www.astonmartinlagonda.com/ www.astonmartin.com/
Martin investors/annual-report en/