Gm Foreign Exchange Competition

FIN 40500 – International Finance

Fall 2012

Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures

Discussion Date: 11/7/12 (Wednesday)

* The case for the assignment is in you Course Readings package and will be discussed in class.

* You will be evaluated based on your individual assignment (maximum 25 points).

* An individual report answering the questions below should be handed in at the start of class. You agree that it is your individual work. It will be graded.

* Please note, that while I am available for a simple clarification, I cannot discuss a “solution” to the case with you before class. I would like you to write your reports based on what you have learned in class and information given in the case.

Question 1: (2 points) The problem

a. Why is General Motors (GM) worried about the level of yen?

Question 2: (17 points) Measuring the effects of a yen depreciation on GM’s value caused by Japanese automakers

(please state your assumptions and show calculations to get full credit)

Estimate the effect of a yen depreciation on GM’s value using the information and steps given in the case. For each step described below, show your calculations and assumptions.

Assumptions given in the case:

i. Yen depreciates 20% against US dollar

ii. Japanese carmakers source 20% to 40% of vehicle’s content in Japan

iii. Japanese automakers will pass on 15% to 45% of their cost savings to consumers

iv. A 5% price increase is expected to cause a 10% decrease in unit sales (and vice versa)

v. Japanese automakers sold 4.1 million cars in the United States

vi. The Big Three US carmakers will lose out equally if the Japanese gain market share

vii. GM has given 1/3 of profit as incentive (find in case exhibit the dollar amount of that incentive)

viii. The annual impact of the depreciation is present valued as a perpetuity with a 20% discount rate

Below are steps to be...