Gm Peso Case Report

International Financial Management -

Case Study:

Foreign Exchange Hedging Strategies at General Motors:

Transactional and Translational Exposures

Group Members

Contents

Introduction 3

Appraisal of GM’s Passive Hedging Strategy 4

Under what circumstances should GM deviate from its formalized hedging policy? 5

What types of hedging instruments are appropriate for GM? Should the same instruments be used in all situations? 8

Comparison with other firm’s hedging policies 10

Nature of exposure to Argentina Peso? 12

Consequences of a devaluation of the Argentinean Peso 13

Should GM hedge its Peso exposure? 16

Any alternatives? 17

Introduction

General Motors was the world’s largest automaker and, since 1931, the world’s sales leader. In 2001, GM had unit sales of 8.5 million vehicles and a 15.1% worldwide market share. Founded in 1908, GM had manufacturing operations in more than 30 countries, and its vehicles were sold in approximately 200 countries. In 2000, it generated earnings of $4.4 billion on sales of $184.6 billion. The company is trying to accurately calculate the risk of a potential devaluation to the ARS. In doing so the company had to decide between two options on how to proceed; was it worth the costs to increase the size of GM’s hedge position beyond the standard policy or should GM Argentina rely on other approaches to cope with the expected devaluation?

Appraisal of GM’s Passive Hedging Strategy

GM’s passive hedging strategy is reflective of its policy to focus on its underlying business rather than speculate on the movements of foreign currency. There are two main types of currency exposure. The first being economic risk. This deals with the impact of devaluation on the present value of the future earnings of the firm. It is very difficult to measure this concept because it depends on the reaction of the competitive context of the firm and the effect of the currency shock over competitors and customers. The second...