Foreign Exchange Hedging Strategies

at General Motors

EMBA55A
Erdiyan Angga Genta Chreyza
29116247 29116176 29116241 29116177
Company Profile
Worlds largest automakers with 8.5 million vehicles for its unit sales
15.1% worldwide market shares
In 2001, it had manufacturing operations in more than 30 countries and sold in
200 countries
Labor costs for its 365,000 employees amounted $19.8 billion
Exposed to foreign exchange risks due to its presence in different geographical
locations and transactions in different foreign currencies
Objectives
Reduce cash flow and earnings volatility
Minimize the management time and costs dedicated to FX
management
Align FX management in a manner consistent with how
GM operated its automotive business.
Risk Identification
No Risk Description Loss Type of Risk
Volatility of USD vs. CAD because of
Fluctuations of Cash
1 the usage of USD as the functional Forex Risk
Flows
currency of GM Canada

Argentinean Peso's devaluation Double the amount of

2 against USD due to decreasing Debt which caused to Forex Risk, Economic Risk
Argentina's default rating decrease the earnings

Depreciation of Japanese Yen (JPY) to Decrease in GM's Market

3 USD, resulted in lower costs for Share compared to its Forex Risk, Business Risk
Japanese firms Japanese competitors
Risk Assessment
Probability
Criteria Score Description
Very High 5 Certainly happen
High 4 Most probably happen
Medium 3 Sometimes happen
Low 2 Less likely to happen
Very Low 1 Never happen
Severity
Criteria Score Description
Very High 5 Very Highly reduced companys financial position
High 4 Highly reduced companys financial position
Medium 3 Reduced companys financial position
Low 2 Reduced companys financial position by a small amount
Very Low 1 Not reduced companys financial position
Risk Assessment
No Risk Description Loss Type of Risk Probability Severity Score
Volatility of USD vs. CAD
because of the usage of USD as Fluctuations of Cash
1 Forex Risk 5 4 20
the functional currency of GM Flows
Canada

Argentinean Peso's Double the amount

devaluation against USD due of Debt which
2 Forex Risk, Economic Risk 2 4 8
to decreasing Argentina's caused to decrease
default rating the earnings

Decrease in GM's
Depreciation of Japanese Yen Market Share
3 (JPY) to USD, resulted in lower compared to its Market Risk 4 3 12
costs for Japanese firms Japanese
competitors
Total Score 40
Risk Mapping
Risk Mitigation
No Risk Description Risk Level Mitigation Action

Using CAD as the functional

Volatility of USD vs. CAD because of the usage
1 High Avoid currency of GM Canada instead of
of USD as the functional currency of GM Canada
USD

Argentinean Peso's devaluation against USD due

2 Medium Transfer Borrow in Argentinean Peso
to decreasing Argentina's default rating

Use natural hedging strategy by

Depreciation of Japanese Yen (JPY) to USD,
3 Medium
resulted in lower costs for Japanese firms
producing cars in Japan in order to
Control reduce costs due to depreciation in
JPY and increase market shares in
Asia.
Risk Mapping after Mitigation
Conclusion and Recommendation
Current hedging strategy is not sufficient for realizing the GMs key
objectives in foreign exchange policy
In order to reduce CAD exposure, GM should use CAD as
functional currency instead of USD
In order to reduce ASR exposure, GM should borrow in ASR to
offset its debt and use options contract for hedging instead of
forward
In order to reduce JPY exposure, GM should produce cars in Japan,
so that it will offset the JPY depreciation.