This website uses cookies to ensure you have the best experience. Learn more

Gm Hbs Case Essay

2652 words - 11 pages

FINM 32203 – International Finance
November 2011

Case #4

‘‘Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures’’

Executive Summary: The purpose of this case study is to analyze the different strategies to hedge against foreign exchange risks; those risks are subdivided into transaction, economic and translation exposures. Throughout this case study, we are going to present the different exposures that General Motors faces and how GM should or should not deviate from its hedging policies regarding the special cases of the CAD and the ARS exposures. All along the case, we also present our suggestions to improve GM’s ...view middle of the document...

- The last category of foreign exchange exposure is the economic exposure or ‘competitive exposure’. It assesses the effects of long run changes in exchange rates on the competitiveness of companies from different locations.

A hedge is an action taken by a company to cover itself against risk. A company like General Motors, which faces transaction and translation risks, can hedge its exposures by internal and external techniques. Internal techniques involve the company in switching its own operations (location, sources of supplies) to reduce the impact of foreign exchange exposures. External techniques involve the use of financial instruments such as options, derivatives and other services provided by banks.

To understand whether a company should hedge or not, we can consider three different hedging policies:

1. Hedge nothing

Small companies unlikely have the awareness of hedging techniques and they do not probably have the capacity to absorb any significant exchange rate losses. This is the most risky position. Furthermore, no hedging policy increases volatility and uncertainty of future cash flows.
On the other hand, academic economic studies indicate that in long term a ‘no hedge’ policy should produce the same results as a fully hedged policy, (Zero Sum Theory). Some people argue there is no point of hedging, as shareholders already diversified and hedged their portfolio (Modigliani & Miller).
To cover currency depreciation ‘price maker’ companies may simply raise the price of its goods in foreign currencies

2. Hedge everything

Hedge everything policy is common in heavy engineering companies when transaction are large and ‘one off’ and where profit margins are tight. A variation on the ‘hedge everything’ policy is to use forward contracts to cover exposures where adverse exchange rate exposures are expected, and to use options when favorable movements seem likely. In practice many companies use forward contracts for certain cash flows in foreign currency and use options to cover uncertain cash flows. Corporate hedging reduces the volatility of earnings and the volatility of future cash flows. Furthermore, lower risk of financial distress may increase debt capacity for a hedged company, and suppliers and customers will prefer to deal with less risky firms. The other consequence of hedging everything is to decrease the cost of capital and to increase the value of the firm as the cost of capital is the basis of the discount rate applied to future cash flows when valuing the business.
3. Selective hedging

Selective hedging involves taking a view on the future movements of exchange rates, the object being to hedge only those exposures where the anticipated risk of loss exceeds the opportunity for gain. Companies first set up their degree of risk aversion. This policy requires time and professional expertise. To contradict Modigliani & Miller theory, individual investors are unlikely to be able to diversify exchange risk...

Other Essays Like Gm Hbs Case

Comparing The Moral Virtues Of Antony And Julian The Apostate

1103 words - 5 pages Roman emperor Julian the Apostate and Christian leader Antony both exhibited many qualities of character during their existence. Both of them led very distinctive lives although shared several ethical values. Book 25 of “The Later Roman Empire” and the book “Early Christian Lives” show concrete evidence of this. In the following essay, I will argue how both leaders’ lives were devoted to their religious beliefs and their mutual cardinal virtues

Living In A Cashless Society Essay

1637 words - 7 pages Money in a traditional sense no longer exists. Money is becoming much of a concept than a physical material, and most ordinary bitter have not see the reality of the switch. People today are using credit and debit cards on a regular basis and in everyday situations such as meal purchased at fast food, highway tolls, clothing, groceries, gas stations, etc. all of these means of systems could be regarded as a cashless society or world. The question

The French And Indian War: The "Real" First World War

1955 words - 8 pages The Seven Years War, or more commonly referred to as “The French and Indian War”, has been called the true First World War. In this book The French and Indian War: Deciding the Fate of North America, the author and historian Walter R. Borneman paints a detailed and elaborate picture that justifies the claim of it being the first true war of global proportions. If ever there truly was a climax to the never ending feud of the European powers

Is The Use Of Animals In Medical Research A Necessary Measure?

1513 words - 7 pages Throughout history, animals have been used in experiments to test product safety and obtain medical knowledge that benefits both humans and animals alike. Every year there are numerous medical breakthroughs, such as medications and surgical instruments, which are tested on animals to insure their safety before they are deemed acceptable for human use. Even though the results of the experiments saved millions of human lives, they are also

Education And The Evolving Job Market

2363 words - 10 pages The lives of students today are changing. They are preparing for lives and jobs that have never before existed. If teachers hope to have a significant and worthwhile impact on these quickly changing lives, they must change the way they think, prepare, and instruct our future generations. Children cannot afford to have teachers who remain stagnant in their methods and ideals. Students crave instructors that are willing to allow them to tap

Young And Relentless

1737 words - 7 pages There are numerous influences that can be responsible of teenager’s behaviors and attitude as they develop. One factor that is important to these behaviors is parental figures being over involved or uninvolved in their children’s lives. Many of these effects include illegal substance abuse, rising sexual activity, underage alcohol consumption, and tobacco use. Studies show parental participation plays a key role in the characteristics developed

The Natural Law Theory

1231 words - 5 pages arguments of all. Aquinas first looks at motion which is a similar development to whatever is here derived from something else, this leads to Aquinas’ first proof the proof from motion, and it is the most obvious case to prove: We observe motion all around us. Whatever is in motion now was at rest until moved by something else, and that by something else, and so on. But if there were an infinite series of movers, all waiting to be moved by

Resolved: Presidential Signing Statements Threaten To Undermine The Rule Of Law And The Separation Of Powers

1811 words - 8 pages requires nor forbids a president from issuing a signing statement” (Ellis & Nelson, 2010) The use of signing statements can be dated back to the early 19th century, but have historically functioned as minor and ritualistic statements made by the President to explain their reasons for signing a bill into law, much like that which is done in the case of a veto (Kinkopf, 2006). The first use of a signing statement to refuse to enforce a provision

Oppressive Systems Of Government In Egypt And Animal Farm

1529 words - 7 pages As in Egypt, Orwell demonstrates through his allegorical novel “Animal Farm” that leaders are able to establish and maintain power over a people, and in turn create an oppressive and corrupt government system. Orwell shows the significant difference in the education and levels of knowledge in the animals, and how the government takes advantage of this difference. The split between the levels of intelligence is portrayed in the first chapter when

The Pathway To Psychosis

1415 words - 6 pages “How all occasions do inform against me” is a line from act IIII, scene IIII of William Shakespeare’s Hamlet. This line, spoken by Hamlet, expresses his emotional state as he is currently overwhelmed by the death of his father, the king of Denmark, and the situation surrounding it. After Hamlet learns of his father’s death he finds out that his mother has married Claudius, Hamlet’s uncle. On top of all of that, Hamlet soon after

Rated “M” For “More Censorship Not Needed”

1241 words - 5 pages Since the moment video games became a commercial success there have been people who have pushed for unfair amounts of censorship to be placed upon the content of the games and its availability to children. These groups push for increased regulations on content but there is already an appointed group to handle this issue, the ESRB. Even though there has been an increase in mature content in the video game industry, increased censorship is not

Related Papers

Hi/Aids At The Workplace Essay

5897 words - 24 pages Financial Officer (CEO) Chief Commercial Officer (CCO) Chief Technical Officer (CTO) Chief Information Systems Officer (CIO) General Manager Corporate and Legal Services (GM C&LS) General Manager Human Resources (GM HR) General Manager Corporate Strategy (GM CS) At inception, the vast majority of the executive team was non Ugandan. Although it was a deliberate policy of the company to pass the reigns of management to native Ugandans

The Business Essay

5982 words - 24 pages ? ________________________________________________________________________________________________________________ HBS Professor HBS Professors Robert J. Dolan and Benson P. Shapiro and writer Alisa Zalosh prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. Although based on real events and despite occasional references to actual companies, this case is fictitious and any resemblance to actual persons or entities is

The Separation Of Capital Ownership And Control

1577 words - 7 pages monitoring and asymmetric information. Managers run business on a daily basis and then as a consequence, have a more comprehensive view of the business while owners get information only based on annual reports or data provided by managers. In this case, there is no rational reason to expect managers will act as they promised. By contrast, there is another theory citing that the separation of ownership from control can be efficient, which is

The Versatility And Flexibility Of Oled's

1014 words - 5 pages In April 1, 2002, organic light emitting diodes gain rise in the scientific community with their published, more practical form at Ames Laboratory. “Scientists at the U.S. Department of Energy's Ames Laboratory, in collaboration with scientists at the University of Michigan, Ann Arbor, have developed and demonstrated a novel, fluorescence-based chemical sensor that is more compact, versatile and less expensive than existing technology of its