General Motors was the world’s largest automaker and, since 1931, the world’s sales leader. In 2001, GM had unit sales of 8.5 million vehicles and a 15.1% worldwide market share. Founded in 1908, GM had manufacturing operations in more than 30 countries, and its vehicles were sold in approximately 200 countries. In 2000, it generated earnings of $4.4 billion on sales of $184.6 billion. The company is trying to accurately calculate the risk of a potential devaluation to the ARS. In doing so the company had to decide between two options on how to proceed; was it worth the costs to increase the size of GM’s hedge position beyond the standard policy or should GM Argentina rely on other approaches to cope with the expected …show more content…
In contrast to an active hedging policy, a passive hedging policy is not be used to enhance returns. Therefore, GM Corporation’s treasurers are not allowed to benefit from exposure to appreciating foreign currencies.
Furthermore, the formulated objectives imply that balance sheet exposure or translation exposure, respectively, are completely ignored within GM Corporation’s foreign exchange risk management policy. Here the essential assumption could be that multinational companies, like GM Corporation, having business in many countries and regions are able to compensate the impact of currency volatility in the value of assets and liabilities through devaluation in one currency with revaluation in another.
Derived from the identified firm specific primary objectives relating to the foreign exchange risk management policy, the actual risk management process can be developed at a second stage. In general, there are four key steps that firms should take to manage their underlying currency risks accurately:
1. Risk Identification Identify and analysis the type of currency risk to be managed, i.e. transaction exposure 2. Risk evaluation Measurement methodology, i.e. create a model to measure the currency exposure to be managed and calculate exposure 3. Risk mitigation Covering strategy, i.e. determine to what extent and how exposure will be hedged and hedge execution, i.e. hedge exposure through trade execution and other