Foreign Exchange

Hedging Strategies at
General Motors
Hanindita Guritna
29114713

Company Profile

Worlds largest automakers with 8.5 million vehicles for its unit
sales

15.1% worldwide market shares

In 2001, it had manufacturing operations in more than 30

countries and sold in 200 countries

Labor costs for its 365,000 employees amounted $19.8 billion

Exposed to foreign exchange risks due to its presence in

different geographical locations and transactions in different
foreign currencies

Objectives
Reduce

cash flow and earnings volatility

Minimize

the management time and costs

dedicated to FX management

Align

FX management in a manner consistent with

how GM operated its automotive business.

Risk Identification
No

Risk Description

Loss

Volatility of USD vs. CAD because of

the usage of USD as the functional
currency of GM Canada

Fluctuations of Cash
Flows

Argentinean Peso's devaluation

against USD due to decreasing
Argentina's default rating

Double the amount of

Debt which caused to
decrease the earnings

Depreciation of Japanese Yen (JPY) to Decrease in GM's Market

USD, resulted in lower costs for
Share compared to its
Japanese firms
Japanese competitors

Type of Risk

Forex Risk

Forex Risk, Economic Risk

Forex Risk, Business Risk

Risk Assessment
Probability
Criteria

Score

Description

Very High

Certainly happen

High

Most probably happen

Medium

Sometimes happen

Low

Less likely to happen

Very Low

Never happen
Severity

Criteria

Score

Description

Very High

Very Highly reduced companys financial position

High

Highly reduced companys financial position

Medium

Reduced companys financial position

Low

Reduced companys financial position by a small amount

Very Low

Not reduced companys financial position

Risk Assessment
No

Risk Description

Loss

Type of Risk

Probability

Severity

Score

Volatility of USD vs. CAD

because of the usage of
USD as the functional
currency of GM Canada

Fluctuations of
Cash Flows

Forex Risk

20

Argentinean Peso's
devaluation against USD
due to decreasing
Argentina's default rating

Double the
amount of Debt
which caused to
decrease the
earnings

Forex Risk, Economic

Risk

Decrease in GM's
Depreciation of Japanese
Market Share
Yen (JPY) to USD, resulted
compared to its
in lower costs for
Japanese
Japanese firms
competitors

Market Risk

12

Total Score

40

Risk Mapping

Risk Mitigation
No

Risk Description

Risk
Level

Mitigation

Action

Volatility of USD vs. CAD because of the

usage of USD as the functional currency of
GM Canada

High

Avoid

Using CAD as the functional

currency of GM Canada instead
of USD

Argentinean Peso's devaluation against USD

due to decreasing Argentina's default rating

Medium

Transfer

Borrow in Argentinean Peso

Control

Use natural hedging strategy by

producing cars in Japan in order
to reduce costs due to
depreciation in JPY and increase
market shares in Asia.

Depreciation of Japanese Yen (JPY) to USD,

resulted in lower costs for Japanese firms

Medium

Risk Mapping after Mitigation

Conclusion and Recommendation

Current hedging strategy is not sufficient for realizing the

GMs key objectives in foreign exchange policy

In order to reduce CAD exposure, GM should use CAD as

functional currency instead of USD

In order to reduce ASR exposure, GM should borrow in ASR

to offset its debt and use options contract for hedging
instead of forward

In order to reduce JPY exposure, GM should produce cars

in Japan, so that it will offset the JPY depreciation.