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12 month C$ cash flow forecast 1,682.

00
C$ Monetary asset / (liability position 2,143.00
Total 3,825.00
3.1% drop Base case 3.1% up

Exchange rate CAD/USD 1.529 1.578 1.627


12 month C$ cash flow forecast 1,682.00
Hedged portion 50% 841.00 532.95 532.95 532.95
Unhedged portion 50% 841.00 550.00 532.95 516.93

Sub-total 1,082.96 1,065.91 1,049.88

Difference from existing exposure 1,065.91 - 17.05 - 16.02

C$ Monetary asset / (liability position 2,143.00


Not Hedged 1,401.49 1,358.05 1,317.21

Difference because of FX movements 1,358.05 - 43.45 - 40.83

TOTAL - 60.50 - 56.86

Probability - 20.17 - 18.95


Shares outstanding 550.00
Unfavourable EPS Impact
- 3.64

- 1.21

-0.0022
12 month C$ cash flow forecast 1,682.00
C$ Monetary asset / (liability position 2,143.00
Total 3,825.00
3.1% drop Base case 3.1% up

Exchange rate CAD/USD 1.529 1.578 1.627


12 month C$ cash flow forecast 1,682.00
Hedged portion 75% 1,261.50 799.43 799.43 799.43
Unhedged portion 25% 420.50 275.00 266.48 258.46

Sub-total 1,074.43 1,065.91 1,057.89

Difference from existing exposure 1,065.91 - 8.53 - 8.01

C$ Monetary asset / (liability position 2,143.00


Not Hedged 1,401.49 1,358.05 1,317.21

Difference because of FX movements 1,358.05 - 43.45 - 40.83

TOTAL - 51.97 - 48.85

Probability - 17.32 - 16.28


Shares outstanding 550.00
Unfavourable EPS Impact
- 3.13

- 1.04

-0.00189
Exposure in CAD Million 20 Exchange Rate (C

1.4000 1.4500 1.5000 1.5500


Forward Contracts - 50% hedged 50%
50% Hedged 10 6.3828 6.3828 6.3828 6.3828
50% Unhedged 10 7.1429 6.8966 6.6667 6.4516
Total 13.5257 13.2794 13.0495 12.8345

Call options contract


National hedge amount 6.3828
50% Hedged 10 0.0000 0.0000 0.0000 0.0000
Premium cost (1.45%) 1.45% -0.092551 -0.092551 -0.092551 -0.092551
50% Unhedged 10 7.1429 6.8966 6.6667 6.4516
Total 7.0503 6.8040 6.5741 6.3591

Difference forward - options contracts 6.4754 6.4754 6.4754 6.4754


Exchange Rate (CAD/USD)
Forward
Rate
1.5667 1.6000 1.6500 1.7000 1.7500 1.8000

6.3828 6.3828 6.3828 6.3828 6.3828 6.3828


6.3828 6.2500 6.0606 5.8824 5.7143 5.5556
12.7657 12.6328 12.4434 12.2652 12.0971 11.9384

6.3828 6.3828 6.3828 6.3828 6.3828 6.3828


-0.092551 -0.092551 -0.092551 -0.092551 -0.092551 -0.092551
6.3828 6.2500 6.0606 5.8824 5.7143 5.5556
12.6731 12.5403 12.3509 12.1726 12.0046 11.8458

0.0926 0.0926 0.0926 0.0926 0.0926 0.0926


ARS Monetary Assets
Scrap incentive owned by government 45.80
Interest subsidy owned by government 3.20
VAT credit and other tax owned by government 130.60
Receivable (tax credit reimbursement 2.70
Other 7.80
Total ARS Monetary Assets 190.10

USD Monetary Assets


Cash 2.50
Receivables 20.50
Total USD Monetary Assets 23.00

Total Monetary Assets 213.10

ARS net property, plant and equipment 350.00


(assumption)

Total Assets 563.10

First Problem faced by GM Argentina


Net USD Monetary Liabilities 302.80

With likely devaluation of peso to 2:1


Estimated loss on foreign exchange flowed through 302.80
Statement of Income

Translated Argentina Balance Sheet

Total Assets in USD 293.05

Hedging Strategy
1 Remain Unhedged 303.08

2 Forward Market Hedged 325.53 22.45


Three-month Forward 18.20
343.73

3 Money Market Hedge


Principal 224.50
USD investment rate per year 5%

USD needed today 221.73

ARS needed at the current spot rate 221.73

4 Option Hedge
Principal 224.50
Strike price 1.40
Premium rate 1.50% 4.71

WACC 12% 4.86

Exercise call option


Strike price 1.40 314.30
Call option premium 4.86
Total maximum expense of call option hedge 319.16
ARS Monetary Liabilities
Payables to local suppliers 24.10
Provisions to local suppliers 11.30
ARS loan (VAT financing) 13.70
Other provisions 9.80
Tax payable 2.00
Total ARS Monetary Liabilities 60.90

USD Monetary Liabilities


Account payable 224.50
Loans 101.30
Total USD Monetary Liabilities 325.80

Total Monetary Liabilities 386.70

Stockholder's Equity 176.40


Common stock at 1:1 100.00
Retained earning 76.40

Total Liabilities and Equity 563.10

Implication : Stockholder's Equity -126.40


will become negative

Total Liabilities in USD Dollar 356.25


(divided by 2)
Common stock (assumption) 100.00
Retained earnings 76.40
Translation loss adjustment -239.60

Total Stockholder's Equity -63.20

Titak Assets and Liabilities 293.05


ARS Monetary Assets ARS Monetary Liabilities
Scrap incentive owned by government 45.80 Payables to local suppliers
Interest subsidy owned by government 3.20 Provisions to local suppliers
VAT credit and other tax owned by government 130.60 ARS loan (VAT financing)
Receivable (tax credit reimbursement 2.70 Other provisions
Other 7.80 Tax payable
Total ARS Monetary Assets 190.10 Total ARS Monetary Liabilities

USD Monetary Assets USD Monetary Liabilities


Cash 5.00 Account payable
Receivables 41.00 Loans
Total USD Monetary Assets 46.00 Total USD Monetary Liabilities

Total Monetary Assets 236.10 Total Monetary Liabilities

ARS net property, plant and equipment 350.00 Stockholder's Equity


(assumption)

Total Assets 586.10 Total Liabilities and Equity


24.10
11.30
13.70
9.80
2.00
60.90

449.00
202.60
651.60

712.50

-126.40

586.10
Ending spot exchange
rate
ARS/USD
Strategy 1 Strategy 2 Strategy 3 Strategy 4

Forward Money Option


Unhedged Market Market Hedge
Hedge Hedge

224.50
1.00 224.50 343.73 221.73 4.86
1.05 235.73 343.73 221.73 4.86
1.10 246.95 343.73 221.73 4.86
1.15 258.18 343.73 221.73 4.86
1.20 269.40 343.73 221.73 4.86
1.25 280.63 343.73 221.73 4.86
1.30 291.85 343.73 221.73 4.86
1.35 303.08 343.73 221.73 4.86
1.40 314.30 343.73 221.73 4.86
1.45 325.53 343.73 221.73 319.16
1.50 336.75 343.73 221.73 319.16
1.55 347.98 343.73 221.73 319.16
1.60 359.20 343.73 221.73 319.16
1.65 370.43 343.73 221.73 319.16
1.70 381.65 343.73 221.73 319.16
1.75 392.88 343.73 221.73 319.16
1.80 404.10 343.73 221.73 319.16
1.85 415.33 343.73 221.73 319.16
1.90 426.55 343.73 221.73 319.16
1.95 437.78 343.73 221.73 319.16
2.00 449.00 343.73 221.73 319.16
No Chain of Events

1 A depreciation in the yen lead to

additional gross margin for Japanese automaker,


2 who

3 passed along some of this benefit to consumes in


the form of lower prices and,

as a result of lower prices, the Japanese


4 automakers gained market share in the U.S,
which

5 ate into unit sales at GM, which

6 lowered GM's profit, which

7 reduced GM's market value


Data Collected

For every 1 yen depreciation, Japanese competitor's collective profit grew by more US$400 Million

Average Japanese content 20%-40% and pass-through rate 15%-45% of the cost savings. Cross elasticity to GM
sales : a 5% increase to lower unit sales by around 10%. Japanese automaker derived 56% and 43% of their
revenues from the U.S. market in 1999 and 2000.

Average incentive per unit in the US : Honda 664, Toyota 725

Any market share losses to Japanese automakers be shared equally by the Big Three

Average net income to net sales of GM for the past three years 2.6% (Exhibit 1)

Discount rate on income statement negative impact = 20% at perpetuity


Pass-through rate
30% 15% 45%

Assumption for Assumption Base Case Case 1 Case 2


Base Case

100 Exchange rate (Yen/USD) 100 100 100

1 Yen depreciation case, cost savings


400 (in million dollar) in terms of 400 400 400
operating profit

pass-through rate on cost savings (in


30% 120 60 180
million US$)

Cost saving impact of Japanese


50% automakers to gaining big market (in 60 30 90
million US$)

3 Shared equally by three 20 10 30

Impact to net income (on average


2.60% 0.52 0.26 0.78
2.6% to net sales)

20% Impact to GM's market value 2.6 1.3 3.9