Gm Hedging Options

Question 1

On a fundamental level Feldstein was concerned that the depreciation of the Yen would lead to a weakening of GM’s competitive position. There was no underlying financial risk as no receivable or payable existed, nor did any capital investment or loan need to be repaid. Feldstein did however envisage a chain of events that would ultimately lower GMs market value:

1. Depreciation of the Yen

Japanese carmakers cost base is in Yen and much of their revenue is derived in US$. A depreciation of the Yen would be beneficial in this regard.

2. Additional gross margin paid to Japanese automakers

The depreciating Yen makes Japanese cars relatively less expensive to manufacture in US dollar terms thus increasing gross margin

3. Passed on the benefit to consumers via price reductions

This increased gross margin would enable Japanese car-makers to reduce the price offered to consumers

4. Lower prices lead to increased market share

These lower prices would have a knock-on effect on sales and Japanese carmakers would increase market share

5. Increased market share for Japanese automakers leads to lower GM share

As GM is the dominant US carmaker much of these gains in market share would be at the expense of GM

6. Profits decrease

Falling market share would thus lead to a fall in profits at GM

7. Market capitalization falls

Assuming the price to earnings ratio remains constant, profits would fall

Ultimately Feldstein realized that despite GM having no internal exposure to the Yen in the context of the external competitive landscape a Yen depreciation would be very detrimental to GM’s business.

Question 3

A quick and dirty analysis of a firms competitive exposure can be gleaned through performing a number of different basic analyses. Whilst this will not enable complex quantitative calculations and results, it will produce a high level analysis of the firm’s exposures to different currencies as a result of the competitive analysis.

Look at the...