Gm Hedging

Case 13: Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures

1. Why is GM worried about the level of the yen?

GM is worried about the level of the yen, because its Japanese competitors could gain a cost advantage in the event of a Yen depreciation. As these competitors derived roughly 50% of their revenues from the U.S. market, a depreciation of the Yen could allow for greater incentives and savings to be passed onto U.S. consumers. Already equity analysts had estimated that the yen appreciation in the first half of 2000 from 117 to 107 reduced operating profits by $4B, thus this would be true for the reverse in the case where a depreciation would lead to an increase in operating profits.

2. How important is GM’s competitive exposure to the yen?

GM also had several yen denominated assets and liabilities in net receivables ($900M), a loan, a bond ($500M) and significant short equity positions in Japanese automakers.

GM’s competitive exposure to the yen is significant as for every on-yen deprecation against the dollar; Japanese competitors’ collective operating profit grew by more than $400. Research reports suggested that the Japanese firms were unprofitable when the yen was stronger than 110 / $ and profitable at 120 / $ or more.

3. How would you go from the information in the case about competitive interactions with Japanese manufacturers to a value exposure for GM?

Assuming a 20% appreciation in the yen, this would decrease net sales (2000) for GM by $739 with 2% of revenues coming from GM Asia. This would be countered by an increase in $8.6B in collective profit for Japanese automakers.

GM’s exposure to the yen is significant from a short equity stake perspective in Fuji, Isuzu, and Suzuki, totaling $820 million. Hence, it would make a profit if the Yen would devalue and a loss if the Yen would appreciate, if GM closes the position. Taking into account GM’s liabilities we have a net gain position if the yen would...