Gm Hedging

Recommendations

Increase hedge to 75% for hedging the Canadian exposure. The combined hedge percentage is to account for both operational as well as balance sheet hedge due to monetary assets on the balance sheet. Hedge the Argentina position. Hard currency assets must be increased. Hedging can be done using the forward rates of another reliable hard currency. Other natural ways to hedge would be through commodities exports/imports done by Argentina.

Alternatives Considered and Ruled Out

Not hedge the monetary liabilities in the balance sheet of the Canadian subsidiary – Monetary liabilities are without respect to future prices and this may create an exchange risk. So this has to be edged. Not hedging this would be risky

Analysis

Hedging is necessary for a company such as GM. Appendix A provides arguments along this line. GM has to revise its policies. It should analyze each transaction on a case by case basis. For transactions that can be subject to high volatility, it is prudent to hedge a greater percentage of the nominal amount of the transaction. The current hedging policy does account for this volatility in calculations of positions to be hedged.

A hedging mechanism for such high volatile currencies ensures that the company does not lose money. The policy must be changed to assess net balance sheet impact (consider monetary liabilities and balance sheet effect also). This is because not only operational cash flow items but balance sheet items such as monetary liability are also subject to exchange risk. If you consider GM’s Canadian, the operational cash flows are 1,682 (Exhibit 9). Exhibit 10 also reveals an insight on the balance sheet effects and the monetary liabilities which are subject to exchange rate risk.

Exhibit 11 shows the ARS Monetary liabilities which are subject to exchange rate risk. Both ARS monetary assets and liabilities have to be hedged to prevent erosion of value. One way would be to convert to other hard...