SENSITIVITY ANALYSIS: FOREIGN EXCHANGE EXPOSURE (AUTOS)

A sensitivity analysis allows us to gauge how certain variables may change others under hypothetical situations. This is done by calculating sensitivity coefficients which are defined as the change of a response value (e.g., oil prices to fuel costs or exchange rates to operating profits.)

A common assumption is that Japanese automakers exporting a larger portion of their domestic production will naturally suffer from an appreciating ¥/$ exchange rate; the strengthening yen makes Japanese autos more expensive to foreign consumers, thereby causing a drop in sales and vice versa. Following this theory,  it stands to reason that Mazda—a company that exports nearly 75 percent of its domestic car production—would suffer large profitability losses (and vice versa) with volatile exchange rate fluctuations.

The table below tests that theory with a simply sensitivity analysis. Using company data in a time-series alongside our FY05 operating profit (OP) estimates, we can test the impact to OP from a one yen change in the exchange rate of the dollar and euro, respectively.

Our first scenario tests a depreciation of the yen by one. Based on company data, a one yen change in the dollar exchange rate leads to a 22.5bn yen, 10bn yen, 10bn yen, 1bn yen, and 3bn yen change for Toyota, Nissan, Mazda and MMC, respectively, while a one euro change sees a lower impact on OP. The reason is one of market positioning; these automakers have larger sales in the U.S. than in Europe.

Strangely enough, according to our estimates, the exchange rate would need to depreciate by 33 yen (23%) and 32 yen (23%), respectively, in order for MMC to see positive operating profit growth in FY05.

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