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    Foreign Exchange Hedging Strategies at General Motors

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    Narendra Shakya
    This document discusses foreign exchange strategies at General Motors and their competitive exposures. It summarizes that in 2001, GM was the world's largest automaker but earned less than competitors with costs denominated in weaker currencies like the Japanese yen. The document outlines GM's hedging policy and instruments, and estimates their total exposure to currency fluctuations at $3.56 billion, primarily from investments and receivables denominated in the yen. It poses addressing GM's risk from currency movements as a problem to be solved, potentially through expanding their hedging strategies.

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    Foreign Exchange Hedging Strategies at General Motors

    Uploaded by

    Narendra Shakya
    401 views11 pages
    This document discusses foreign exchange strategies at General Motors and their competitive exposures. It summarizes that in 2001, GM was the world's largest automaker but earned less than competitors with costs denominated in weaker currencies like the Japanese yen. The document outlines GM's hedging policy and instruments, and estimates their total exposure to currency fluctuations at $3.56 billion, primarily from investments and receivables denominated in the yen. It poses addressing GM's risk from currency movements as a problem to be solved, potentially through expanding their hedging strategies.

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    This document discusses foreign exchange strategies at General Motors and their competitive exposures. It summarizes that in 2001, GM was the world's largest automaker but earned less than competitors with costs denominated in weaker currencies like the Japanese yen. The document outlines GM's hedging policy and instruments, and estimates their total exposure to currency fluctuations at $3.56 billion, primarily from investments and receivables denominated in the yen. It poses addressing GM's risk from currency movements as a problem to be solved, potentially through expanding their hedging strategies.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    401 views11 pages

    Foreign Exchange Hedging Strategies at General Motors

    Uploaded by

    Narendra Shakya
    This document discusses foreign exchange strategies at General Motors and their competitive exposures. It summarizes that in 2001, GM was the world's largest automaker but earned less than competitors with costs denominated in weaker currencies like the Japanese yen. The document outlines GM's hedging policy and instruments, and estimates their total exposure to currency fluctuations at $3.56 billion, primarily from investments and receivables denominated in the yen. It poses addressing GM's risk from currency movements as a problem to be solved, potentially through expanding their hedging strategies.

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    The key takeaways are that GM faces competitive exposure to currency fluctuations especially against the Japanese Yen given its large operations globally and competition from Japanese automakers. It aims to reduce volatility in cashflows and earnings through a passive hedging strategy of 50% of risks using various instruments like forwards, options depending on the time horizon.

    GM's key objectives for managing foreign exchange risk are to reduce cash flow and earnings volatility, minimize management time and costs dedicated to FX risk management, and ensure alignment of FX management with its various business operation units.

    The presentation quantifies GM's competitive exposure to the Japanese Yen based on factors such as accounts receivable, investments in Japanese firms, bond issues, and the chain of events by which yen depreciation could impact GM's unit sales, profits and market value. The total estimated competitive exposure is calculated to be $3.56 billion.

    FOREIGN EXCHANGE STRATEGIES

    AT GENERAL MOTORS:
    COMPETITIVE EXPOSURES

    PRESENTED BY:
    NARENDRA KUMAR SHAKYA (2015PGP030)
    RAMESH SINGH (2015PGP038)
    FOREIGN EXCHANGE STRATEGIES AT GENERAL
    MOTORS: COMPETITIVE EXPOSURES
    General Motors was the worlds largest automaker in year
    2001.
    Unit Sold by GM in 2001 : 8.5 million vehicles.
    15.1% of world market share.
    Generated earnings : $4.4 billion on sales of $184.6 billion.
    North America : (Exhibit 2)
    Majority of sales to end customers.
    Largest Concentration of net property, plant and equipment.
    GMs Corporate Hedging policy

    GMs global operations give rise to currency risks.


    Risks managed by treasurers Office.
    Key Objectives of GMs FX risk management policy were as:
    Reduce cash flow and earnings volatility.
    Minimize the management time and costs dedicated to FX.
    Alignment of FX management with GM business operation units.
    GM follow passive hedging strategy with limited management
    time spent on FX management.
    Feldstein monitored FX exposures and also focus on those risks
    which was not covered by hedging policy and possibly not direct
    or indirect effect on GMs business.
    Instrument used for hedging activity by GM are :
    GM adopted Passive Hedging Policy which generally hedge to
    50%. of risk due to FX exposure.
    Significant Foreign exposures comes from cash flows
    (Receivable & Payables)
    1.Forwards contracts( hedging within 6months)
    2. Options(hedging 7-12 months)
    Understanding Competitive Exposures

    GMs exposure to the Japanese yen was as result of competing


    against companies with different homes currencies.
    Major Japanese automakers cost structure denominated in YEN.
    Lowered cost structure advantage to competitors.
    Risk due to lowered cost structure eroded market share and
    market value.
    Japanese automakers derived 56% and 43% of their revenue from
    US market in 1999 and 2000, respectively.
    Measuring Competitive Exposures
    Exposure as a competitive rather than a financial one as per
    Feldstein.
    Bottom Line Impact(net profit) arise from fluctuations in
    exchange rates.
    Lack of an explicit transaction, Feldstein was away from hedging
    policy.
    Feldstein form a story for justifying the magnitude of exposure
    and how it could be effectively hedged.
    Chain of Events
    1) Depreciation of Yen.
    2) Increased gross margin for Japanese automakers.
    3) Passing benefit to the end consumer
    4) Decrease in unit sales of GM
    5) Reduced GM profit
    6) Lower market value

    Net Estimated Competitive Exposure


    (50% is taken care of by


    Passive Hedging policy) Commercial Exposure (A/C receivable) 900million

    Commercial Exposure hedged only for 50% 450million

    Investment Exposure ( Japanese Firm) 2.61billion

    Bond Issue 500million

    Total 3.56Billion


    PROBLEM STATEMENT

    Quantify GM exposure.
    Recommendation or decisions on managing GM risk.
    Hedging strategies.
    HEDGING INSTRUMENTS

    TOTAL AMOUNT THAT NEEDS TO


    BE HEDGED HEDGING INSTRUMENT


    (50% is taken care
    of by Passive Commercial Exposure (A/C
    Hedging policy) receivable) 900 million

    Commercial Exposure hedged


    only for 50% 450 million ICE Futures

    Investment Exposure ( Japanese Using ETF fund like


    Firm) 2.61billion CARZ, ADRA

    Bond Issue 500 million Government bond

    Total 3.56Billion


    THANK YOU

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