General Motors Fx Risk Hedging Policy

Executive Summary:

The continuous expansion of General Motors’ multinational business operations resulted in the increased exposure to foreign exchange volatility risks, impacting the income statement and the balance statement. In order to minimize this volatility, GM maintained a passive hedging policy that maximized their hedging effects and minimized managerial costs. However, the different economic and operational situations of international subsidiaries would give rise to several situations that warrant special attention and possible deviation from the standard policy.

In the case of the Canadian Dollar exposure, a comparison will be made between the standard policy of hedging 50% of transactional exposure, and an increased hedging ratio of 75%. By analyzing the decreased range in volatility of the subsidiary’s earnings per share, we reach the conclusion that a deviation from the policy should be able to account for the excessive translational exposure General Motors has to the Canadian Dollar.

The exposure to economic risk and a possible devaluation of the currency warrants the question of whether General Motors’ translational exposure to the Argentinean Peso should be pegged utilizing forward contracts. Calculating the risk exposure amount and the subsequent hedging cost, we do not recommend pegging against the Peso using derivatives such as forwards. Instead, it would be more effective to hedge by utilizing operating hedges.

Introduction:

General Motors, with 15.1% worldwide market share, was the largest automaker in 2001. The amount of foreign market exposure warranted concern over the currency exchange and required significant risk management decisions. The responsibility for risk management was carried out by the General Motors Treasurer's Office and subjected to oversight by the Risk Management Committee, including Treasurer and VP, Eric Feldstein. The two pressing issues at the time were i) GM's 1 billion dollar exposure to the Canadian dollar...