GM, transaction exposure
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Case Study 6
Foreign exchange hedging strategies at General
Motors: Transactional and translational exposures
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General Motors (GM) was the largest automaker in the world, and the unit sales in 2001 was 8.5 million vehicles which occupied 15.1% of the total vehicle market. With the expansion through the world, GM faced more risk in the foreign exchange (FX). In other world, it would create gains or losses due to the changes in FX rate. According to the exhibit 2 and exhibit 3, Latin America and the
Europe are the largest market, and the shares of Asia are increasing, which means
Asia should be an important strategic objective for GM. So hedging could help
GM reduce the risk. Moreover, it can reduce cash flow and earnings volatility, minimise the management time and costs dedicated to global FX management and align FX management in a manner consistent with how GM operates its automotive business.
For the different exposures, GM implements different ways to hedge.
Commercial (operating) exposure, GM would calculate the implied risk which equals to regional notional exposure times annual volatility of relevant currency pair. If the implied risk is more than 10 million, G M s h o u l d h e d g e 5 0 % exposures. At the same time, at least 25% exposures should be hedged by options in order to assure flexibility. On top of that, all financial exposures should be hedged while GM did not take translation (balance sheet) exposures into consideration.The following would discuss the specific issue of GM: the
Canadian Dollar and Argentina Peso.
GM-Canada was an essential part of GM’s worldwide production process. It is not only a part to serve Canadian market, but also acts as a core supplier to other parts while it is served by other parts at the same time. Because of that,
U.S.dollar is selected as the functional currency which means the exposures of
U.S. dollar to Canadian dollar is recognised as a foreign currency exposure.
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Case Study 6
Foreign exchange hedging strategies at General
Motors: Transactional and translational exposures
!
General Motors (GM) was the largest automaker in the world, and the unit sales in 2001 was 8.5 million vehicles which occupied 15.1% of the total vehicle market. With the expansion through the world, GM faced more risk in the foreign exchange (FX). In other world, it would create gains or losses due to the changes in FX rate. According to the exhibit 2 and exhibit 3, Latin America and the
Europe are the largest market, and the shares of Asia are increasing, which means
Asia should be an important strategic objective for GM. So hedging could help
GM reduce the risk. Moreover, it can reduce cash flow and earnings volatility, minimise the management time and costs dedicated to global FX management and align FX management in a manner consistent with how GM operates its automotive business.
For the different exposures, GM implements different ways to hedge.
Commercial (operating) exposure, GM would calculate the implied risk which equals to regional notional exposure times annual volatility of relevant currency pair. If the implied risk is more than 10 million, G M s h o u l d h e d g e 5 0 % exposures. At the same time, at least 25% exposures should be hedged by options in order to assure flexibility. On top of that, all financial exposures should be hedged while GM did not take translation (balance sheet) exposures into consideration.The following would discuss the specific issue of GM: the
Canadian Dollar and Argentina Peso.
GM-Canada was an essential part of GM’s worldwide production process. It is not only a part to serve Canadian market, but also acts as a core supplier to other parts while it is served by other parts at the same time. Because of that,
U.S.dollar is selected as the functional currency which means the exposures of
U.S. dollar to Canadian dollar is recognised as a foreign currency exposure.
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