Fe Hedging Gm
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FE Hedging Strategies at GM
Should MNCs hedge foreign exchange rate risk?
Multinational firms hedge foreign exchange risk in order to ensure operational and financial functionality. A MNC should hedge foreign exchange risk so it can prevent cash flow effects of the foreign firm and the decline in value of the equity holder because of the movements in exchange rates. It will also help them to reduce transaction costs when obligated to make payments in different currencies, and it offers companies better ways to analyze and evaluate different operations by making subsidiary comparison easier. Companies can better manage future foreign investments and have better control of capital management needs. Exhibit 2 and Exhibit 3 show the importance of hedging in GM’s case.
If not, what are the consequences? If so, how should they decide which exposure to hedge? If a MNC does not hedge it might end up with its cash flow being volatile, and intense volatility in foreign exchange may distort the cash flow. A company’s cash flow from operations can be stable but exchange losses or gains will affect the net income statement and the shareholder’s equity.
As foreign currency risks affect companies’ income statements and balance sheet accounts which is called translation exposure, companies need to focus on the managing of foreign currency risk given their industry related necessities, operations’ tolerance to volatility, and according to their contractual agreements with clients and creditors. Foreign currency risk might also affect companies’ existent obligations and agreements denominated in foreign currencies along, eventually affecting firms’ earnings and cash flow which is called transaction exposure. Besides considering transaction and translation exposure, a company should also consider impacts in prospective revenue and expenses, earnings and cash flow, equity and enterprise value which is called operating
FE Hedging Strategies at GM
Should MNCs hedge foreign exchange rate risk?
Multinational firms hedge foreign exchange risk in order to ensure operational and financial functionality. A MNC should hedge foreign exchange risk so it can prevent cash flow effects of the foreign firm and the decline in value of the equity holder because of the movements in exchange rates. It will also help them to reduce transaction costs when obligated to make payments in different currencies, and it offers companies better ways to analyze and evaluate different operations by making subsidiary comparison easier. Companies can better manage future foreign investments and have better control of capital management needs. Exhibit 2 and Exhibit 3 show the importance of hedging in GM’s case.
If not, what are the consequences? If so, how should they decide which exposure to hedge? If a MNC does not hedge it might end up with its cash flow being volatile, and intense volatility in foreign exchange may distort the cash flow. A company’s cash flow from operations can be stable but exchange losses or gains will affect the net income statement and the shareholder’s equity.
As foreign currency risks affect companies’ income statements and balance sheet accounts which is called translation exposure, companies need to focus on the managing of foreign currency risk given their industry related necessities, operations’ tolerance to volatility, and according to their contractual agreements with clients and creditors. Foreign currency risk might also affect companies’ existent obligations and agreements denominated in foreign currencies along, eventually affecting firms’ earnings and cash flow which is called transaction exposure. Besides considering transaction and translation exposure, a company should also consider impacts in prospective revenue and expenses, earnings and cash flow, equity and enterprise value which is called operating