Foreign Exchange Policy at Gm

Topics: Forward contract, Derivative, Cost-benefit analysis Pages: 2 (710 words) Published: April 14, 2013
Your write-up should be eight to ten pages (double-spaced). If you provide information outside the case or the textbook, use a footnote to indicate the source. You can use pictures, but no more than four, and each figure should be no more than half a page in size. 1.Hedging Policies at GM. Describe GM’s corporate hedging policies. What are the objectives of GM’s FX risk management policies? What are GM’s passive policies to hedge operating exposures? Use the numbers provided in the case on Canadian dollars to illustrate (you have to change the numbers on pages 4 and 5 from euro to Canadian dollar and follow the same logic). 2.Transaction Exposures vs. Translation Exposures. Define transaction exposures and translation exposures. What are the differences between the two? Use GM-Canada as an example to explain. Describe the accounting treatments of the translation exposures and the gains/losses associated with hedging positions and how the accounting treatments may affect firms’ incentives to hedge. 3.75% or 50%? With CAD 1.682 billion cash flow exposure projected over the subsequent twelve months, what is the loss (in US$ amount) if CAD appreciates 3.1% from the value of 1.578CAD/$ on the date of memo, assuming the firm uses the passive 50% hedging policy (be careful here because it’s indirect quote, so a 3.1% CAD appreciation means the exchange rate will be 1.529CAD/$). What is the loss if the firm hedges 75% of the exposure? Notes: a) GM can buy CAD forward contract at a forward rate of 1.5667CAD/$; GM can also buy CAD call options with a strike price of 1.5667CAD/$; you can ignore the costs of hedging (such as option premiums; i.e., assuming the options are free). 2. Additionally, Ostermann wanted your analysis to reflect the “excess cash” of CAD 660 million held by GM Canada (which means you can deduct this amount from the CAD 1.682 billion exposure). 4.Hedge Argentinean Peso or Not? GM had more ARS monetary assets than ARS monetary liabilities in 1991...
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