Foreign Exchange Hedging Strategies at General Motors Critique

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Foreign Exchange Hedging Strategies at General Motors Critique

Luke Bennrubi

Britten Feldman

Hillary Felice

Drew Ferwalt

❏ Review important topics

❏ Discuss material covered well

❏ Cover material missed

q Commercial (Operating) Exposure: Volatile currencies

are hedged for only 6 months and risk threshold

lowered to $5 million from $10 million

q Commercial (Capital) Exposure: Amounts in excess of

$1 million not $10 million (typo)

q Accounting Policies: Held gains and losses from

hedging in shareholder’s equity account

q Reporting: Hedging activities closely tracked; policy lead

to passive switch

GM Hedging Policy Objectives

❏ Reduce cash flow and earnings volatility

❏ Minimize the management time and costs dedicated to global FX management

❏ Align FX management in a manner consistent with how GM operates its automotive business

Passive vs Active Hedging

business in foreign markets

❏ Uses forward/options contracts (0-100%)

❏ Protects against exchange rate volatility

❏ Managers exploit inefficiencies in market

❏ Fundamental, technical, dynamic, option-based

“The second objective was a consequence of an internal study that determined that investment of resources in active FX (foreign exchange) management had

not resulted in significant outperformance of passive benchmarks.”

Transactional Exposure

❏ Definition: Gains and losses when transactions

are settled in currency other than reporting

currency

❏ Buying activities

❏ Selling activities

❏ Financing decisions (borrowing)

Translational Exposures

❏ Definition: Gains and losses that arise when assets and liabilities are translated back into

reporting currency

❏ Determined by functional currency

❏ GM does not hedge translational exposures

❏ Generally not large enough

❏ When large enough, senior finance executives are notified