Three primary objectives:
1) Reduce cash flow and earnings volatility – this means management hedges the company’s transaction exposures and deliberately pays no attention to any balance sheet exposures or translation exposures.
2) Minimize the management time and costs dedicated to global FX management – this is as a result of an internal study that determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. An active approach was implemented.
3) Align FX management in a manner consistent with how GM operates its automotive business – this was an effort to plan to the …show more content…
GM could hedge to protect a future period against the possibility of the devaluation of the Argentinean Peso by selling it forward and buying it forward. Another hedging approach to take into account the ARS assets totaling 190 and liabilities totaling 60.9 that are at exchange rate risk would be to convert ARS assets to USD.
Similarly to mitigate some translation risk for the CAD GM could select a spot rate at which the value of the assets in ARS (190 per exhibit 11) could be sold.
GM was exposed to competitive risk as a result of competing against companies with different home currencies. The possibility of the Yen devaluing would result in an increase in the competitors’ gross margin, which was dominated in Yen. For every 1 Yen depreciation Japanese operating profit grew by $400MM.
The newly realized gross margins would allow for savings that would be passed along to the consumer in the form of lower prices, positioning GM as a competitor with higher prices.
The change in pricing structures would create a rippling affect in consumer purchasing decisions, which in the medium and long term would impact GM market share and value.
Other sources of exposure included investment exposure in the form of GM’s accounts receivables and payables in the amount of $900MM, financing exposure as a result of a Yen dominated loan; and Yen bond issue with $500M