General Motors Risk Management Policy
What was the stated objective of General Motors Risk Management policy?
Three primary objectives:
1) Reduce cash flow and earnings volatility – this means management hedges the company’s transaction exposures and deliberately pays no attention to any balance sheet exposures or translation exposures.
2) Minimize the management time and costs dedicated to global FX management – this is as a result of an internal study that determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. An active approach was implemented.
3) Align FX management in a manner consistent with how GM operates its automotive business – this was an effort to plan to the geographical operational footprint of the underlying business.
The passive policy implemented by GM is to hedge 50% of all major foreign exchange commercial or operating exposures. Regional treasury had the following guidelines: invest in forward contracts to hedge 50% of the exposures for the first six months and options to hedge 50% of the exposures for the remaining six months. Finally, to assure flexibility, at minimum of 25% of the combined hedge on a particular currency is to be in options.
Though GM had implemented prescribed policies that guided the majority of treasury operations, there were suggestions for the Canadian dollar, Argentinean peso, and Japanese yen that were situations that required departure from these formal policies.
Define and demonstrate the source or sources of group risk. Be sure to provide justification for your assertions from the case data.
The following highlights sources of risk for the proposals outlined for Canadian dollar, Argentinean peso, and Japanese yen.
The CAD is weak and the concern lies in that if it strengthens given that the primary operating currency is USD and a large amount of GM-Canada’s assets and liabilities are in Canadian dollars.
An appreciation in the CAD would
Three primary objectives:
1) Reduce cash flow and earnings volatility – this means management hedges the company’s transaction exposures and deliberately pays no attention to any balance sheet exposures or translation exposures.
2) Minimize the management time and costs dedicated to global FX management – this is as a result of an internal study that determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. An active approach was implemented.
3) Align FX management in a manner consistent with how GM operates its automotive business – this was an effort to plan to the geographical operational footprint of the underlying business.
The passive policy implemented by GM is to hedge 50% of all major foreign exchange commercial or operating exposures. Regional treasury had the following guidelines: invest in forward contracts to hedge 50% of the exposures for the first six months and options to hedge 50% of the exposures for the remaining six months. Finally, to assure flexibility, at minimum of 25% of the combined hedge on a particular currency is to be in options.
Though GM had implemented prescribed policies that guided the majority of treasury operations, there were suggestions for the Canadian dollar, Argentinean peso, and Japanese yen that were situations that required departure from these formal policies.
Define and demonstrate the source or sources of group risk. Be sure to provide justification for your assertions from the case data.
The following highlights sources of risk for the proposals outlined for Canadian dollar, Argentinean peso, and Japanese yen.
The CAD is weak and the concern lies in that if it strengthens given that the primary operating currency is USD and a large amount of GM-Canada’s assets and liabilities are in Canadian dollars.
An appreciation in the CAD would