AES case study 
A. Situation: What are GMs translation and transaction exposure to the yen? What is GM’s competitive exposure to the yen? (Quantify how much could they lose?);
Steps to estimate GM’s loss from a 20% devaluation of the yen:
1.
Compute the percentage cost savings the Japanese automakers will pass on to consumers (how much will they lower prices)
2.
How many more cars will the Japanese sell per year at this lower price?
3.
How many less cars will GM sell?
4.
How much profit will GM lose due to lost sales to the Japanese?
B. Alternatives: How could they hedge the competitive exposure? Should they?
C. What should they do? Why? How? What are the effects? GM’s translation exposure refers to their balance sheet exposure; while, transaction exposure pertains to GM’s cash flows risk. GM’s current transaction exposure to the yen is $400 million. This number is calculated by taking GM’s accounts payable and subtracting them from accounts receivable. This number is given as $900 million, when you subtract long term debt from this ($500 million) you find the exposure is equal to
$400 million. GM’s competitive exposure is due to competitors possibly taking advantage of a devaluation of the yen to hurt GM’s market share. With a devaluation of the yen, competitors could pass some of their savings on to the customers, in the form of lower prices. GM could hedge against the competitive exposure by increasing their investments in
Japanese Automakers, specifically Suzuki. Currently, GM has ownership stake of 20% in Suzuki and is only exposed to $.09 billion. Their percentage ownership in Suzuki is tied for the fewest with Fuji and has the least exposure amongst the three Japanese auto manufacturers. Increasing investments in Suzuki would assist GM’s hedge against
Japanese competitors benefiting from a devaluing yen. GM should look to hedge by investing more in Suzuki and other Japanese auto manufacturers. Given the recent trend of yen per dollar,
Steps to estimate GM’s loss from a 20% devaluation of the yen:
1.
Compute the percentage cost savings the Japanese automakers will pass on to consumers (how much will they lower prices)
2.
How many more cars will the Japanese sell per year at this lower price?
3.
How many less cars will GM sell?
4.
How much profit will GM lose due to lost sales to the Japanese?
B. Alternatives: How could they hedge the competitive exposure? Should they?
C. What should they do? Why? How? What are the effects? GM’s translation exposure refers to their balance sheet exposure; while, transaction exposure pertains to GM’s cash flows risk. GM’s current transaction exposure to the yen is $400 million. This number is calculated by taking GM’s accounts payable and subtracting them from accounts receivable. This number is given as $900 million, when you subtract long term debt from this ($500 million) you find the exposure is equal to
$400 million. GM’s competitive exposure is due to competitors possibly taking advantage of a devaluation of the yen to hurt GM’s market share. With a devaluation of the yen, competitors could pass some of their savings on to the customers, in the form of lower prices. GM could hedge against the competitive exposure by increasing their investments in
Japanese Automakers, specifically Suzuki. Currently, GM has ownership stake of 20% in Suzuki and is only exposed to $.09 billion. Their percentage ownership in Suzuki is tied for the fewest with Fuji and has the least exposure amongst the three Japanese auto manufacturers. Increasing investments in Suzuki would assist GM’s hedge against
Japanese competitors benefiting from a devaluing yen. GM should look to hedge by investing more in Suzuki and other Japanese auto manufacturers. Given the recent trend of yen per dollar,