FOREIGN EXCHANGE STRATEGIES

AT GENERAL MOTORS:
COMPETITIVE EXPOSURES

PRESENTED BY:
NARENDRA KUMAR SHAKYA (2015PGP030)
RAMESH SINGH (2015PGP038)
FOREIGN EXCHANGE STRATEGIES AT GENERAL
MOTORS: COMPETITIVE EXPOSURES
General Motors was the worlds largest automaker in year
2001.
Unit Sold by GM in 2001 : 8.5 million vehicles.
15.1% of world market share.
Generated earnings : $4.4 billion on sales of $184.6 billion.
North America : (Exhibit 2)
Majority of sales to end customers.
Largest Concentration of net property, plant and equipment.
GMs Corporate Hedging policy

GMs global operations give rise to currency risks.

Risks managed by treasurers Office.
Key Objectives of GMs FX risk management policy were as:
Reduce cash flow and earnings volatility.
Minimize the management time and costs dedicated to FX.
Alignment of FX management with GM business operation units.
GM follow passive hedging strategy with limited management
time spent on FX management.
Feldstein monitored FX exposures and also focus on those risks
which was not covered by hedging policy and possibly not direct
or indirect effect on GMs business.
Instrument used for hedging activity by GM are :
GM adopted Passive Hedging Policy which generally hedge to
50%. of risk due to FX exposure.
Significant Foreign exposures comes from cash flows
(Receivable & Payables)
1.Forwards contracts( hedging within 6months)
2. Options(hedging 7-12 months)
Understanding Competitive Exposures

GMs exposure to the Japanese yen was as result of competing

against companies with different homes currencies.
Major Japanese automakers cost structure denominated in YEN.
Lowered cost structure advantage to competitors.
Risk due to lowered cost structure eroded market share and
market value.
Japanese automakers derived 56% and 43% of their revenue from
US market in 1999 and 2000, respectively.
Measuring Competitive Exposures
Exposure as a competitive rather than a financial one as per
Feldstein.
Bottom Line Impact(net profit) arise from fluctuations in
exchange rates.
Lack of an explicit transaction, Feldstein was away from hedging
policy.
Feldstein form a story for justifying the magnitude of exposure
and how it could be effectively hedged.
 Chain of Events
1) Depreciation of Yen.
2) Increased gross margin for Japanese automakers.
3) Passing benefit to the end consumer
4) Decrease in unit sales of GM
5) Reduced GM profit
6) Lower market value


Net Estimated Competitive Exposure

(50% is taken care of by

Passive Hedging policy) Commercial Exposure (A/C receivable) 900million

Commercial Exposure hedged only for 50% 450million

Investment Exposure ( Japanese Firm) 2.61billion

Bond Issue 500million

Total 3.56Billion

PROBLEM STATEMENT

Quantify GM exposure.
Recommendation or decisions on managing GM risk.
Hedging strategies.
HEDGING INSTRUMENTS

TOTAL AMOUNT THAT NEEDS TO

BE HEDGED HEDGING INSTRUMENT

(50% is taken care
of by Passive Commercial Exposure (A/C
Hedging policy) receivable) 900 million

Commercial Exposure hedged

only for 50% 450 million ICE Futures

Investment Exposure ( Japanese Using ETF fund like

Firm) 2.61billion CARZ, ADRA

Bond Issue 500 million Government bond

Total 3.56Billion

THANK YOU