Gm Hedging
What is GM’s foreign exchange hedging policy?
GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically, management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second, GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. The third objective is to align FX management with the firm’s core automotive business.
The passive policy adopted by GM is to hedge 50% of all significant foreign exchange commercial (operating) exposures on a regional level (General Motors North America, General Motors Europe, General Motors Asian Pacific, and General Motors Latin America, Africa, Middle East). Each regional treasury center is required to use particular derivative instruments over specified time horizons. The guidelines are as follows: forward contract to hedge 50% of the exposures for months one through six and options to hedge 50% of the exposures for months seven through twelve. In general, at least 25% of the combined hedge on a particular currency is to be held in options in order to assure flexibility.
What do you think of GM’s foreign exchange policy? More specifically, what are the questionable aspects of GM’s policy?
GM’s strategy for its foreign exchange policy consists of clear objectives and FX management alignment with operational activities. The company’s passive hedging strategy is reflective of GM’s policy to focus on its underlying business rather than speculate on the movements of FX. From this standpoint, GM’s treasury department is provided with specific guidelines in their functions. For example, each regional treasury center is
GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically, management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second, GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. The third objective is to align FX management with the firm’s core automotive business.
The passive policy adopted by GM is to hedge 50% of all significant foreign exchange commercial (operating) exposures on a regional level (General Motors North America, General Motors Europe, General Motors Asian Pacific, and General Motors Latin America, Africa, Middle East). Each regional treasury center is required to use particular derivative instruments over specified time horizons. The guidelines are as follows: forward contract to hedge 50% of the exposures for months one through six and options to hedge 50% of the exposures for months seven through twelve. In general, at least 25% of the combined hedge on a particular currency is to be held in options in order to assure flexibility.
What do you think of GM’s foreign exchange policy? More specifically, what are the questionable aspects of GM’s policy?
GM’s strategy for its foreign exchange policy consists of clear objectives and FX management alignment with operational activities. The company’s passive hedging strategy is reflective of GM’s policy to focus on its underlying business rather than speculate on the movements of FX. From this standpoint, GM’s treasury department is provided with specific guidelines in their functions. For example, each regional treasury center is