A substantial part of Prestige Cars Ltd's sales are to North America where it operates through a wholly owned subsidiary. Its principal competitors are German. It has been reported widely that Prestige Cars Ltd hedges its US$ exposure, using the foreign exchange markets, by covering future expected US$ sales revenue.
In March 1988 its 1987 results were announced showing a reduction in profit from the previous year. This reduction was attributed partly to the decline in the sterling value of the US dollar. On this announcement Prestige Cars Ltd's share price fell by about 5 per cent, relative to the market.
(a) How would you expect hedging of future sales revenue to be implemented?
(b) Given that sales revenue has been hedged, why are current earnings affected by the £/$ exchange rate?
(c) What impact would you expect the covering of future sales revenue to have on Prestige Cars Ltd's share price?