Case “Foreign Exchange Hedging Strategies at General Motors: Transitional and Transactional Exposures” issues
Case “Foreign Exchange Hedging Strategies at General Motors: Transitional and Transactional Exposures”
Issues:
1. Should multinational firms hedge foreign exchange rate risk? They should to better manage the foreign exchange risks.
If not, what are the consequences? The gains in the foreign country would contribute less when the foreign currency depreciated against the home country’s currency.
If so, how should they decide which exposures to hedge? The firm should focus on the importance of hedging exposures to the current market and the cost that should be spent on hedging. And the internal hedge policy.
a. What is hedging? Why do companies hedge?
When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.
b. What are reasons for hedging against currency fluctuations?
If the company has a large scale of international transactions, hedging against currency fluctuations would help the company to raise further capital to meet the foreign asking price.
c. What are types of exposures faced by multinational firms?
Transaction exposure, economic exposure, translation exposure, contingent exposure.
2. If multinational firms hedge foreign exchange rate risk, what decisions have to be made to implement a hedging policy?
a.i. What should be hedged?
a.ii. How much should be hedged?
Depends on how the company’s risk management team views the market risk (foreign exchange, interest rate and commodities and commodities exposures) and the counterparty, corporate and operational risk.
a.iii. How should one hedge? (What instruments should be used for hedging?)
Forward (0--6) and option
Issues:
1. Should multinational firms hedge foreign exchange rate risk? They should to better manage the foreign exchange risks.
If not, what are the consequences? The gains in the foreign country would contribute less when the foreign currency depreciated against the home country’s currency.
If so, how should they decide which exposures to hedge? The firm should focus on the importance of hedging exposures to the current market and the cost that should be spent on hedging. And the internal hedge policy.
a. What is hedging? Why do companies hedge?
When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.
b. What are reasons for hedging against currency fluctuations?
If the company has a large scale of international transactions, hedging against currency fluctuations would help the company to raise further capital to meet the foreign asking price.
c. What are types of exposures faced by multinational firms?
Transaction exposure, economic exposure, translation exposure, contingent exposure.
2. If multinational firms hedge foreign exchange rate risk, what decisions have to be made to implement a hedging policy?
a.i. What should be hedged?
a.ii. How much should be hedged?
Depends on how the company’s risk management team views the market risk (foreign exchange, interest rate and commodities and commodities exposures) and the counterparty, corporate and operational risk.
a.iii. How should one hedge? (What instruments should be used for hedging?)
Forward (0--6) and option