Foreign Exchange Hedging Strategies at General Motors

Foreign Exchange Hedging Strategies at General Motors

General Motors:

• one of the world’s largest automakers
• unit sales of 8,5milion vehicles un 2001 (world sales leader)
• GM and its strategic partners produce cars and trucks in 31 countries
• GM’s largest national market is China, followed by USA, Brazil, the UK, Germany, Canada and Russia

1. What do you think of GM's foreign exchange hedging policy?

General motor’s overhall foreign exchange risk management policy established on 3 main objectives :  

• Reduce cash flow and earnings volatility
• Minimize the management time cost dedicated to global fx management
• Align FX management in a manner consistent with how GM operates its automotive business

Hedging Policies:

1. Operating

Category: Cash flow associated with ongoing business such as receivables and payables

Hedging Ratio: 50%

Hedging Strategy: passive

If implied risk > or = 10$ million: require to be hedged

If implied risks are lowered to $5 million: only hedge for the coming 6 months.

Implied risk = Regional Notional exposure * Annual Volatility of relevant currency Pair

Regional Notional Exposure = Regional Receivables – Regional Payables

1. Capital expenditures

Capital expenditures: funds used by a company to acquire or upgrade physical assets.

Policy: 100% hedged when amount excess of $1 million or implied risk equivalent to at least 10% of the unit’s net worth

Financial expenditures

• Any deviation from the passive hedging strategy (50% notional hedging ratio) requires the approval
• Hedged on a case-by-case basis
• Financial exposures are generally hedged 100% by using forward contract
• Dividends only deemed hedgeable once declared and using a 50% hedge ratio

GM has a good hedging policy which focus on both its situation and it objective.

But translation exposure is also a major risk for a multinational company like GM.

Anyway I think that GM should hedge its translation exposure to reduce the negative effect caused by fluctuating exchange rate.

2. Why is GM worried about Argentinean Peso exposure?

GM Treasury’s Latin America experts believed the short-term probability of default had reached 40%. In the medium term, the probability rose to 50% because Argentina had not addressed key issues such as trade liberalization, state reform, and pension and healthcare reform.

Hedging the Peso Exposure

GM Argentina had already eliminated peso cash balances and transferred them in USD to the European Regional Treasury Center. It was also considering the purchase of some materials locally in ARS for export to other entities on the region that would pay for them in hard currency. GM-Argentina’s USD borrowings would certainly have to be addressed.