Foreign Exchange Hedging Strategies at General Motors
Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures
Prepared By:
Danial Wahaj Khan
EXECUTIVE SUMMARY:
This report is based on a practical scenario solution of General motors. The report addresses the problem given in scenario which is the change in policy of hedging with detailed reasoning. The report then looks at the different available hedging instruments to the firm. Profitability of both instruments has been compared and lowest cost option was selected to mitigate the transactional risk. Translation risk has also been seen at different hedging ratio levels; current one and the proposed one. The options were more profitable to the firm that has been recommended. Argentinean subsidiary’s long term local currency problems have then be discussed with few different strategies that managers can adopt there. The appendix contains the technical calculations and graph that were necessary to support the decisions.
INTRODUCTION:
The case study addressed the exposure of General Motors to the foreign risk that arises due to its presence at a number of geographical locations and transactions in different foreign currencies. Corporate hedging policy does exist in this regard however there are two special cases that were addressed in the case study. The matters require special consideration as the existing policy is not very much appropriate to these two matters. One matter is the company’s exposure to the foreign exchange risk arises from Canadian subsidiary which has functional currency USD so CAD is foreign currency for this subsidiary. There are two types of risks that GM faces in this situation; one is translation risk and the other one is transaction risk. The company’ is looking at different hedging strategies to mitigate the risks and dealing with the matter exceptionally from the company’s policy. In order to that different instruments (options and forward contracts) should be analyzed for different level of hedge
Prepared By:
Danial Wahaj Khan
EXECUTIVE SUMMARY:
This report is based on a practical scenario solution of General motors. The report addresses the problem given in scenario which is the change in policy of hedging with detailed reasoning. The report then looks at the different available hedging instruments to the firm. Profitability of both instruments has been compared and lowest cost option was selected to mitigate the transactional risk. Translation risk has also been seen at different hedging ratio levels; current one and the proposed one. The options were more profitable to the firm that has been recommended. Argentinean subsidiary’s long term local currency problems have then be discussed with few different strategies that managers can adopt there. The appendix contains the technical calculations and graph that were necessary to support the decisions.
INTRODUCTION:
The case study addressed the exposure of General Motors to the foreign risk that arises due to its presence at a number of geographical locations and transactions in different foreign currencies. Corporate hedging policy does exist in this regard however there are two special cases that were addressed in the case study. The matters require special consideration as the existing policy is not very much appropriate to these two matters. One matter is the company’s exposure to the foreign exchange risk arises from Canadian subsidiary which has functional currency USD so CAD is foreign currency for this subsidiary. There are two types of risks that GM faces in this situation; one is translation risk and the other one is transaction risk. The company’ is looking at different hedging strategies to mitigate the risks and dealing with the matter exceptionally from the company’s policy. In order to that different instruments (options and forward contracts) should be analyzed for different level of hedge