Ruta Is Great

The issue:

Major Japanese automakers had large portions of their cost structures denominated in yen. Hence, depreciation in yen lowered their relative cost structure as compared to US and European automanufacturers. GM’s competitors achieved reduced costs through currency depreciations. It meant that GM’s business faced currency risk. Lower costs for Japanese firms would lead to lowered required prices to achieve normal profitability levels, thus eroding GM’s market share.

Gauging consumer sales and GM sales elasticity

Definition:

An investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.

Advantages and Disadvantages of Various Hedges

Forward Contracts:

A cash market transaction in which a seller agrees to deliver a specific cash commodity to a buyer at some point in the future. Unlike futures contracts (which occur through a clearing firm), cash forward contracts are privately negotiated and are not standardized.

Advantages

- Can be written for any amount and term

- Offers a complete hedge

Disadvantages

- Difficult to find a counterparty (no liquidity)

- Requires tying up capital

- Subject to default risk

Futures Contracts:

Advantages

- Lots of liquidity

- Position can be reversed easily

- Doesn’t tie up much capital

Disadvantages

- Written for fixed amounts and terms

- Offers only a partial hedge

- Subject to basis risk (bond issuer can default)

Options:

The right, but not the obligation, to buy (for a call option) or sell (for a put option) a specific amount of a given stock, commodity, currency, index, or debt, at a specified price (the strike price) during a specified period of time.

Advantages

- Limits potential losses without limiting...