Gm Hbs Case

ESSEC MS TF - FAM

FINM 32203 – International Finance

November 2011

Case #4

‘‘Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures’’

Executive Summary: The purpose of this case study is to analyze the different strategies to hedge against foreign exchange risks; those risks are subdivided into transaction, economic and translation exposures. Throughout this case study, we are going to present the different exposures that General Motors faces and how GM should or should not deviate from its hedging policies regarding the special cases of the CAD and the ARS exposures. All along the case, we also present our suggestions to improve GM’s hedging strategies

1. Should multinational firms hedge foreign exchange risk? If not, what are the consequences? If so, how should they decide which exposures to hedge?

Exchange rates fluctuate for many currencies. Thus the forecast domestic currency value of foreign currency assets, liabilities or cash flows would change as exchange rates change. This foreign exchange risk can be considered such as transaction, translation and economic exposures.

- The transaction exposure arises between the date of the commercial contract and the date of the payment (conversion) of domestic currency into required foreign currency. It also exists for cash transfer (i.e. capital expenditure/receipts such as dividends denominated in foreign currency). A company can also face a pre-transaction exposure, committed to receive payment in a foreign currency. Once the price list is denominated in foreign currency there is an uncertainty of domestic currency cash receipts.

- The translation exposure arises from the changes in the value in home currency of foreign assets and liabilities from one balance sheet date to the next. The consolidations of the year-end can be affected by a change of exchange rate.

- The last category of foreign exchange exposure is the economic exposure or...