Foreign Exchange Hedging Strategies at General Motors Critique

Review important topics, discuss material covered well, cover material missed As the main contents of the lecture Foreign Exchange Hedging Strategies at General Motors Critique. Invite you to refer to the lecture content more learning materials and research.

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

GM Hedging Policies

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

❏ Currency exposure is inevitable when doing

business in foreign markets

❏ Passive Hedging

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

❏ Protects against exchange rate volatility

❏ Active Hedging

❏ 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

❏ Stem from many different things

❏ 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

Canadian Exposure

q Large Canadian dollar assets and liabilities

q Supplied GM operations in N America

q Relied on U.S based supplies

q Functional currency set as USD

q Translational exposure

Effect on Pretax EPS

What is the effect on GM’s pretax EPS if the CAD appreciates to 1.5291? What if it depreciates to 1.6269? Again, please show exactly how you came up with these numbers.

1 When the CAD appreciates, EPS declines and when the

CAD depreciates, EPS rises.

2 EPS, not cash EPS

3 The best way to identify the earnings effect from the set of given information is by quantifying a +/-3.1% change in

Shareholder’s Equity

1 Assets - Liabilities = Shareholder’s Equity

Calculation

GM in Argentina

If the ARS is devalued to 2.00, what will be the net effect on GM?

1 The functional currency should use ARS because the economic effect of XR changes of the overseas operating unit is relatively self contained and integrated within Argentina

2 G/L from translation adjustment from consolidating foreign to the parent doesn't directly affect cash flow It directly affects owners equity

Hedging ARS Exposure

● There is a serious risk that the devaluation will cause Argentina to default on its debt

● Forward contracts are priced as they are because of the economic instability in Argentina.

● GMA can borrow in ARS to offset its risk.