a. If GM does deviate from its formal policy for its CAD exposure, how should GM think about whether to use forwards or options for the deviation from the policy?
If GM somehow decides to deviate from its formal hedging policy for the hedging of CAD exposure, then it will have two options, whether to use forward exchange contracts or forward contract options. However, if GM goes for forward exchange rate contracts, then GM would be bound to fulfill the requirement of forward the contract regardless the number of contracts required at the maturity of the forward contract. Where this option would provide the right to exchange foreign currency at a fixed rate forward contract, meanwhile, this contract will restrict the lower side favorable movement in exchange rate and would bound GM to perform his part of the obligation regarding the forward contract. On the other hand the options on forward contract would allow GM to take advantage of favorable movements in foreign exchange prices and would avoid the obligation to execute the forward option. Meanwhile, the forward option would require upfront premium payments so that option can be exercised if they are in favor of GM.
Competitive Exposures
b. Why is GM worried about the level of the yen?
Since the base currency of General Motor is USD then why it should be worried about the level of exchange rate for yen in comparison of USD, however, this is because of the economic exposure risk because the devaluation of Yen would make its product more cheap in the international market which would allow to offer its products at lower prices in the market.
General Motors is concerned about the devaluation of the yen and this is the main concern of GM over the level of the yen because the devaluation of yen in comparison to the USD will reduce the production cost of Japanese competitors and they would be able to offer lower prices for their goods without affecting their profit margins which would adversely affect the GM’s competitive position in the international market. Meanwhile, GM is aware of the fact that a price increase of 5% would reduce the demand of units sold by around 10%, which means that the demand is highly adverse price elastic that only a 5% increase in price would fall the demand of units by 10% almost double of the decrease in prices. Hence, GM is concerned about the fact that in case its competitors from Japanese lower their prices they would definitely slice the market share of GM and GM’s revenue would fall.
Furthermore, the research had revealed that only a devaluation of 1 yen in comparison of the USD would lead to the increase in GM’s competitors in Japan equal to around $400 million and this increase in their operating profits would undermine the operating performance of GM when their results would be compared with the competitors and their falling performance would probably affect the investor's decision for future performance of GM. In addition to this GM is also concerned about the devaluation of the yen because GM has receivables in CAD of around $900, in addition to this GM had outstanding bonds of around $500 million, meanwhile, it had invested in equity stock of some of the Japanese companies and in case of yen devaluation GM’s cash flows from Japan would be exposed to this decline in yen value. However, the devaluation of yen would strengthen the competitive position of GM’s competitors which has raised some serious concerns for GM’s management.
c. How important is GM’s competitive exposure to the yen?
General Motors’ economic exposure to the yen is very much important from many aspects, since the largest sales volume of GM is in North American automobile market which represents around 72% of General Motors global sales and in case devaluation of yen, GM’s competitors from Japan would be able to offer car to this market at lower prices than the prices offered by General Motors. Meanwhile, the automobile consumers are fully aware of the prices and they do respond to the change in prices, therefore, the low price of cars would attract large number of North American consumers and would probably cut the market share of General Motors and the loss of small percentage of GM’s 72% market share would be a significant fall in customer base resulting in significant threat for GM in the long run...............................
This is just a sample partial case solution. Please place the order on the website to order your own originally done case solution.
Related Case Solutions & Analyses:
Scoring Expert Forecasts
The Lao Coffee Industry: Implementing Vertical Integration for a Social Cause at Bolaven Farms
Does the Management Approach Contribute to Segment Reporting Transparency
Amazon.coms European Distribution Strategy
Pacific Restaurant Supply Ltd.
Disclosure Dilemma: Financial Reporting of Contingent and Environmental Liabilities
California Pizza Kitchen
Financial Performance Measurement for the 21st Century
Project Finance Research, Data, and Information Sources
State of South Carolina
