International Finance Foreign Exchange Hedging Strategies at General Motors:

INTERNATIONAL FINANCE

FOREIGN EXCHANGE HEDGING STRATEGIES AT GENERAL MOTORS: TRANSACTIONAL AND TRANSLATIONAL EXPOSURES

Nyssa Asteria Winata

Pratnya Valorina

Pudiahwai Anton Wibowo

Tegararief Ocki Prakarsa

Winardi Masli 

1. Overview of General Motors and Its Corporate Hedging Policy

General Motors (GM), founded in 1908, was the world’s largest automaker. It had manufacturing operations in more than 30 countries and sold its vehicles in approximately 200 countries. As GM expanded around the world, its exposures to foreign currencies grew significantly. It was essential for GM to understand its foreign exchange flows and to manage the earnings and cash flow volatility they imposed on GM since exchange rate movement resulted in gains and losses that showed through GM.

GM has its own corporate hedging policy to manage its foreign exchange risk management. The policy has three primary objectives:

1. Reduce cash flow & earning volatility.

2. Minimize management time & cost dedicated to global FX management.

3. Align FX management in a manner consistent with how GM operates its automotive business

The policy that GM adopted was generally to hedge 50% of all significant foreign exchange commercial (operating) exposures on a regional level.It differentiated between “commercial” exposures such as receivables and payables (cash flows associated with the ongoing business) and “financial” exposures such as debt repayments and dividends. It also outlined what derivative instruments were used for hedging.

The followings are the exposures that GM faces:

• Commercial exposures (operating), hedge 50% with forward and 50% with option

Then with Implied Risk formula as given below, company hedge regional exposures with for all implied risk above $ 10 million and above. In the case of particular volatile currencies, company hedge the exposure for the coming six months rather than twelve and the threshold was lowered to $ 5 million.Implied Risk = Regional notional...