Finance Management
Foreign Exchange Hedging Strategies at General Motors: Transactional and
Translational Exposures
Anindhyaguna A.
Airin Anugrah W.
Nicholas Aditya
Ramadhika Tetuko P.
Talkah Widya P.
29114439
29114304
29114390
29114533
29114410
YP-52B
SCHOOL OF BUSINESS AND MANAGEMENT
MAGISTER OF BUSINESS AND ADMINISTRATION
INSTITUT TEKNOLOGI BANDUNG
2015
Background.
General
Motor
was
worls
leading
automaker
in
2001
with
15%
market
share
and
$184,6
billion
annual
sales
and
its
made
earning
from
company
$4,4
billion.
The
company
had
aoutombolie
financing
and
division
which
had
annual
sales
of
$24
billion
in
2001
and
earning
of
$1,6
billion.
The
company
sold
their
product
in
200
countries
and
manufacturing
in
30
countries.
General
Motor
organized
its
main
automotive
division
into
four
geographic
divisions
that
is
GM
North
America,
GM
Europe,
GM
Asia
Pasicif
and
GM
Latin
America-Africa-MiddleEast.
General
Motor
have
several
vehicles
suchas
Opel,
Saab,
Chevrolet,
Buick,
Cadillac.
The
case
study
show
General
Motors
faced
the
risk
that
appear
because
of
geographical
locations
and
transactions
in
different
foreign
currencies.
Company
use
hedging
policy
to
decrease
their
risk.
The matters require special consideration as
the existing policy is not very much appropriate to these two matters
One matter is the
companys exposure to the foreign exchange risk arises from Canadian subsidiary which
has functional currency USD so CAD is foreign currency for this subsidiary. There are
two types of risks that GM faces in this situation; one is translation risk and the other one
is transaction risk. The company is looking at different hedging strategies to mitigate the
risks and dealing with the matter exceptionally from the companys policy. In order to
that different instruments should be analyzed for different level of hedge ratio.
Translation risks should also be discussed and impact of them on income statement
should be estimated.
The second matter is the management major translation risk arising
in Argentina subsidiary due to recent major devaluation in the local currency. A strategy
needs to be evaluated to deal with this long term risk.
Problem
1
How
do
company
faced
the
risk
because
of
transaction
in
different
foreign
currencies
?
Analysis
1
Multinational
company
such
as
General
Motor
should
do
hedging
foreign
exchange
rate
risk
to
minimize
the
risk
that
will
appear
because
of
transaction
in
different
foreign
currencies.
Because
foreign
exchange
risk
will
affect
existing
income
statement
and
balance
sheet
(assets,
liabilities
and
equity).
Influences
the
value
of
outstanding
of
several
contract
with
foreign
currency.
And
the
last
it
will
impact
companys
revenue
and
cost.
Because
the
company
operating
in
30
coontries
and
sold
their
product
in
200
countries.
Problem
2
What
currency
should
be
used
by
the
company
?
Analysis
2
Companies
must
use
currencies
that
have
strong
value.
in
addition
the
company
also
had
to
look
at
the
proportion
of
the
area
of
activity
where
the
company
is
located.
The
Biggest
Proportion
so
based
on
the
exhibit
2
and
3
company
should
choose
foreign
exchange
hedging
to
Canadian
Dollar
Problem
3
Why
General
Motor
passive
policy
hedge
50%
of
commercial
(operationg)
exposure
?
Analysis
3
General
motor
choose
passive
policy
hedge
50%
of
commercial
operating
exposure,
the
policy
adobted
was
generally
to
hedge
50%
of
all
significant
exchange
commercial
(operating)
exposures
on
a
regional
level
because
receivable
and
less
payable
in
Canadian
Dollar
is
-1600.
With
receibale
and
less
payable
in
Canadian
dollar
which
is
-1600
covered
by
50%
hedging.
Conclusion
and
Suggestion
Before
the
company
chose
to
do
currency
hedging,
the
company
should
see
the
company's
operations
are
mostly
located.
General
motor
should
hedge
foreign
exchange
rate
risk,
because
it
will
reduce
the
risk
of
changing
in
cash
flow,
reduce
earning
volatility.
The
hedging
instrument
that
shoud
be
used
by
company
is
options
because
it
give
better
result
than
forwards.
The
option
are
better
where
there
is
more
voliatility
or
chances
of
going
upside
or
downside
are
pretty
much
similar,
The
company
currently
use
hedge
ratio
of
50%
,
as
we
seen
the
level
of
high
voliatility
due
to
lower
level
of
hedge
ratio
we
suggest
the
company
to
change
it.
