Foreign Exchange Hedging Strategy At General Motors Transactional And Translational Exposures

Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposure Problem Statement In September of 2001 General Motors (GM) was faced with a billion dollar exposure to the Canadian dollar. At the time, North America represented approximately three-quarters of GMs total sales and this large exposure to the CAD could significantly affect GMs financial results. GM had a passive strategy of hedging 50% of its exposure; this paper explores the impact of hedging 75% of the exposure. Additionally, GM faced a unique problem in Argentina, which was at risk of defaulting on its international loans. A default would also cause the Argentine Peso to be devalued from 1 peso to 1 dollar to 2 pesos to 1 dollar, a substantial change. The chance of the default was estimated to be 40 to 50%. While the exposure was smaller than Canada, it was still significant at $300 million.

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had foreign currency exposure risks for decades. These foreign currency exposures are related to buying, selling, and financing in currencies other than the local currencies in which they operate. Derivative instruments, such as foreign currency forwards, swaps and options are used primarily to hedge their exposures with respect to forecasted revenues, costs and commitments noted in foreign currencies (Wagoner, pg 134). These contracts generally mature in approximately 32 months. As of December 2008, GMs three most significant foreign currency exposures were the U.S. Dollar/Korean Won, Euro/British Pound and U.S. Dollar/Canadian Dollar (Wagoner,134). GM is also exposed to foreign currency risk in other ways; namely, as they convert the results of the international operations into U.S. dollars as part of their consolidation process. Variation in exchange rates can consequently create instability in the results of GM operations and may unfavorably affect their financial position. For example, the effect of exchange rate...

Research On Foreign Exchange Risk Management

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Research On Foreign Exchange Risk Management

Research Paper On Foreign Exchange Risk Management Submitted In Partial Fulfillment Of the Requirement Of Masters of Business Administration

Table of Contents EXECUTIVE SUMMARY 1 CHAPTER 1: PLAN OF THE RESEARCH 4 1.1. INTRODUCTION 5 1.1.1. Features of Forex Market 6 1.1.2. Functions of Forex Market 7 1.1.3.

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Structure of Forex Market 8 1.1.4. Needs for Foreign Exchange 9 1.1.5. What Does Forex Provide? 9 1.1.6. Methods of Quoting Exchange Rates 9 1.1.7. Types of Transactions 11 1.1.8. Factors Affecting Exchange Rates 12 1.1.9. Factors Affecting Indian Rupee 13

1.1.10. FORIEGN EXCHANGE RISK 17 Classification of Foreign Exchange Risk 17 1.1.11. Trends in currencies fluctuation 21 1.1.12. Foreign Exchange exposure 23 Types of Foreign exchange exposure 23 Managing the Transaction Exposure 25 Differences between Forward Contracts & Future Contracts 28 1.2. OBJECTIVES 33 1.3. SCOPE 34 1.4. LITERATURE REVIEW 35 CHAPTER 2: COMPANY PROFILE 38 2. COMPANYS INTRODUCTION 39 2.1. Company History 39 2.2. Company Profile 39 2.3. Company Layout 42 2.4. Companys Role and Vision 43 2.5. Sales Performance 44 2.6. Profitability 45 2.7. Market Share 46 2.8. SWOT Analysis 47 CHAPTER 3: RESEARCH METHDOLOGY 48 3. RESEARCH METHODOLOGY 49 CHAPTER 4: ANALYSIS AT HSCI 50 4 . FOREIGN EXCHANGE RISK MANAGEMENT AT HSCI 51 4.1. Foreign currency exposure faced by HSCI 51 4.2. Foreign currency transactions at HSCI 52 4.3. HSCIs exposure elasticity 52 4.4. Analysis of HSCIs delta 53 4.5. Determining the foreign exchange exposure 55 4.5.1. Imports payment system at HSCI 55

Strengths
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Branding - Born in Detroit Michigan in 1910 General motors has produced a stable of automobiles such as Chevrolet, Pontiac Cadillac and Buick which have become household names in the U.S. As such, the General Motors Brand is well rooted not only in America but throughout the world.

Worldwide Presence - General Motors truly has an international presence with factories in Poland, Russia, South Africa Ecuador, Egypt, Germany, Argentina, Australia, Belgium, Brazil, China, Colombia, South Korea, Spain, Sweden, and Thailand. The company is even in Viet Nam. In addition, it also has assembly, manufacturing, distribution, office and warehousing operations in 55 other countries.

Weaknesses
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Diminishing Dealer Network - General Motors has compiled a list of more than 1,000 dealerships market for closure. The company has announced that it will not renew its franchise agreements with nearly one quarter of its U.S. dealerships. As of December 31, 2008, GM had 715 dealerships in Canada, as recent as May of 2009 plans called for a anywhere from 40 to 200 closures.

Insufficient Liquidity - General Motors has experienced a reduction in liquidity to $14 billion in FY2008 from $27.3 billion in 2007. Losses are attributed to lower sales volumes and a reduction in working capital. Both research and development, as well as relationships with suppliers are negatively affected by the reduced liquidity.

Inadequate Performance among Some Business Segments - In 2008 the GME segment accounted to 21.8% of the total revenues and its revenues decreased 8.8% to $32,440 million. Other business segments experiencing declines include GMNA which fell 23.9% to $82,938 million, and GMAP which stood at $12,477 million for FY 2008, a decline of 15%.

Low Debt Ratings - Four independent credit rating agencies assess GMs debt ratings and ability to pay interest, dividends and principal on securities. Moodys Investor Service, Fitch Ratings DBRS and Standard & Poors evaluate GM. As of 2008, all four had downgraded their assessment ratings for GM.

Opportunities
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Growth Potential in India and China - There are positive projects for GM business in China and India. In China the market for new cars is in the midst of a 14% growth rate projected to reach over $97 billion in 2008. Meanwhile in India, the market for new cars grew by 15.5% in 2008 to a dollar value of $28 billion. A sign that India will play an even bigger is the projected increase to 2.5 million units by the end of 2013.

Increased Global Truck Market - Steady growth rates are projected in the next few years. The market's volume is expected to rise to 21.5 million units by the end of 2013. The light commercial vehicles segment was the markets largest in 2008, generating total volumes of 9.8 million units, equivalent to 58.1% of overall value.

Rising Demand for Hybrid Vehicles - General Motors produces six hybrid models in the US including the Saturn Vue and Aura Hybrids, Chevrolet Malibu and Tahoe Hybrids, GMC Yukon Hybrid as well as a Cadillac Escalade Hybrid. The company is also investing in hybrid and plug-in vehicles, for both cars and trucks. It is anticipated that GM will produce up to nine hybrid models following the introduction of the Chevrolet Silverado Hybrid and GMC Sierra Hybrid. International demand for light hybrid electric vehicles (HEVs) is expected to increase. It is expected to rise to 800,000 units in 2009 and estimated to reach 4.5 million units in 2013. Therefore, a positive outlook for light hybrid electric vehicles and plug-in vehicles market would boost the demand for GMs products.

Threats
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The Continuing Global Recession - Dire predictions for the global economy were realized in 2009 and stalled economic growth continued into 2010. The economic decline reduced consumer demand for less fuel efficient vehicles, including full size pick-up trucks and sport utility vehicles, which had been GMs most profitable products. In addition, the economic climate has resulted in tighter credit markets making it harder for consumers to finance automobile purchases.

Weakness in Global Automobile Industry - Consumer Requirements for commercial vehicles declined in the NAFTA region, Western Europe and Japan. The Western European automobile markets suffered as well particularly the volume markets of Spain down 28.1%, Italy down 13.4% and the UK down 11.3%. Germany declined 1.8%) and France 0.7% also experienced downward trend in the second half of 2008. In total, 8.4% fewer automobiles were sold in Western Europe. The Japanese car market also declined, with a drop in sales of nearly 4% in 2008.

Intense competition - GMs financial status makes it vulnerable to fierce competition from fits such as AB Volvo, Bayerische Motoren Werke, Daimler, Fiat Group Automobiles, Ford Motor, Honda Motor, Hyundai Motor, Isuzu Motors, Mazda Motor, Nissan Motor, PACCAR, PSA Peugeot Citroen, Renault, Toyota Motor and Volkswagen. Many have responded to the crises by adding vehicle enhancements, providing subsidized financing or leasing programs in order to sell more vehicles. They are also offering option package discounts, other marketing incentives and are reducing vehicle prices in certain markets. These actions are expected to have a negative effect on GMs vehicle pricing, market share and operating results particularly on the low end of the market. General Motors, one of the world's largest automakers, traces its roots back to 1908. With its global headquarters in Detroit, GM employs 204,000 people in every major region of the world and does business in some 140 countries.