ROLLS-ROYCE LIMITED
1
SUGGESTED ANSWERS TO ROLLS-ROYCE LIMITED
1. Describe the factors you would need to know to assess the economic impact on Roll-Royce of the change in the
dollar:sterling exchange rate. Does inflation affect Rolls-Royce’s exposure?
ANSWER. Rolls-Royce’s economic exposure is separable into transaction exposure and operating exposure. The
transaction exposure is based on the remaining dollar-denominated engine contracts outstanding. Rolls’s operating
2. Given these factors, how would you calculate Rolls-Royce’s economic exposure?
ANSWER. The price elasticity of demand on new orders is probably very high, unless Rolls has some unique
technology or its service and products are recognized to be of higher quality than its competitors. This is unlikely to
be the case given the competitive nature of the jet engine industry. On the other hand, the price elasticity of demand
3. Suppose Rolls-Royce had hedged its dollar contracts. Would it now be facing any economic exposure? How
about inflation risk?
ROLLS-ROYCE LIMITED
2
4. What alternative financial management strategies might Rolls-Royce have followed that would have
reduced or eliminated its economic exposure on the U.S. engine contracts?
5. What non-financial 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., diversification of export sales)?
ANSWER. Rolls-Royce can try to shift as much production or parts purchases as possible to other
countries. As mentioned above, this is one of the things that Rolls has done. It can also attempt to develop
6. What additional information would you require to ascertain the validity of the statement that “the more
engines produced and sold under the previously negotiated contracts, the greater Rolls-Royce’s losses
will be“?