Foreign Exchange Hedging Strategies at General Motors Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Foreign Exchange Hedging Strategies at General Motors Case Solution

Commercial exposure (Capital Expenditures)

General Motors used different approach for capital expenditures as significance of the capital expenditure on monthly basis could not be measured. GM used the 100 hedging rate in order to anticipate the commercial exposure. It used two tests for hedging which include (1) increasing the payment amount to $ 1 million (2) The risk should be equivalent to at least 10% of net income.

Financial Exposure

• Yen denominated loan

• Bond issue for $500 million worth of outstanding Yen dominated bond. GM’s policy involves 100% hedge using the forward contract;both loans repayment and equity insertion into affiliates.

Translation (Balance sheet) Exposure:

General Motors’ hedging policy does not involve in translation (balance sheet) exposure. Under the Foreign standard, GM Canada uses the US dollar as its functional currency.

Accounting Treatment:

The primary objective of General Motors’ hedging policy was to decrease the earning of instability. GM should use the market to market strategy in order to gain profit and reduce the in stable flows from the financial statement. The wrong book keeping increased the chance of risk and affected the financial statements and this mismatch was a potential source of earning volatility. Moreover, hedging the currency exchange risk had an effect on the financial statement.
Competitive Exposure: resulting from competing against companies from different currencies.

Question: 02
Define the source or sources of risk for General Motors. Support your answers by demonstrating examples from the case.

The Canadian Dollar

GM Canada plays a vital role in the production process of General Motors. It served as a foundation supplier to further increase GM’s functions in North America, particularly those in the United States and also transmitted on the suppliers from the United States. According to the accounting standards, the US currency is more effective for GM’s operations as well as GM Canada also uses US currency as its functional currency. The US currency has significant impact on the financial statement, balance sheet and cash flow of the GM cooperation. There are two assignments from Eric Feldstein, Treasurer and Vice President, Finance for GM Corp. regarding GM Canada’s exposure to Canadian Dollar:
Feldstein required an association of the financial statement which affected both hedging policy, which is 50% and 75% ratio. As per the analysis of the data, it is evaluated that the predictable instability of CAD/USD FX rate is (+ or -) 3.1% around the 1.5780 FX rate on the expected date of the memo. Based on the data of CAD cash flow and net monetary liability, the company identified the favorable and unfavorable scenario of FX’s movement. In addition to this, the favorable scenario shows gain due to FX movement and unfavorable scenario shows loss due to FX movement.

Feldstein also noted that for every there was reduction of 1 Yen against Dollar, as a result Japanese players collective operating profit grew by more than $400 million. The exposure of GM is competitive one rather than financial one. If we divide the amount of after tax gain or loss by the number of 550 million shares,then we can easily identify GM’s operations volatility. Osterman also calculated the proposed deviation, which identified the reduction of EPS volatility. Moreover, Osternann overlooked the cost of hedging in such as premium option. For example; the Japanese Car had between 20% - 40% Japanese components such as supplier, labor and plant expense. The Japanese inducement and inferior sticker prices from depreciation of Yen were between 15% - 20% of the cost of saving............

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Foreign Exchange Hedging Strategies at General Motors Harvard Case Solution & Analysis