Case study foreign exchange hedging strategies at general motors
Particularly forward rates contract and options are used.
Why do companies hedge? In this case where we can easily see that local currency is devaluing with great pace we should look for a long term strategy.
Should multinational firms hedge foreign exchange rate risk?
Argentinean subsidiarys long term local currency problems have then be discussed with few different strategies that managers can adopt there. 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. How to cite this page Choose cite format:. The country has very poor economic situation with no reforms and recent devaluation of currency has caused the managers to think over the strategy that should be followed. Despite operations in Argentina leave GM sensitive to the economic and political situation in Argentina, the potential devaluation in ARS would bring a commercial advantage to GM. Hedging commercial exposure aimed to address the cash flow risk associated with the day to day operations such as receiving cash from sales and paying to suppliers. The report then looks at the different available hedging instruments to the firm. Translation exposure or cash flow exposure concerns the actual cash flow involved in settling transactions denominated in foreign currency. It is usually used where company is not interested in gains rather pure hedging. They also hedge regionally where they should have a centralised hedging policy where the residual risk can be calculated and hedged.
The options were more profitable to the firm that has been recommended. The idea is that home currency appreciation foreign currency depreciation translates into lower receipts and higher payments, respectively. GM Corporation, however, operates only with financial hedging instruments, i.
Risk evaluation Based on the risk identification, both risk categories have to be assessed objectively in terms of their individual impact and probability. Another argument states that future spot exchange rate is difficult to predict, hence hedging is like gambling, however hedging is a planning tool to focus on the future not to guarantee results.
What do you think of gm?s foreign exchange hedging policies? would you advise any changes?
The second objective was a consequence of an internal study that determined that investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. Other options to deal with that could be borrowing in the local currency as it minimizes the level of payments that should be remitted to the parent. Currency Options Currency options are financial instruments that give the owner the right but not the obligation to buy or sell a specific foreign currency at a predetermined exchange rate. Shifting the currency exchange risk does not cause the exchange exposure to disappear it simply shifts to the counterparty. In order to analyze the commercial exposures of capital expenditures GM Corporation uses a different approach. Risk evaluation Based on the risk identification, both risk categories have to be assessed objectively in terms of their individual impact and probability. As a result, policy was changed and a passive approach replaced the active one. A call option gives the holder the right to buy the currency at an agreed price. The main advantage of futures over forwards is the ability to liquidate before the maturity date. For Financial exposure resulting from loan repayment or equity transactions, it was hedged on case by case basis.
based on 37 review