General Motors and Risk

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GM and Risk

Murat Memic
Analyzing various global risks that General Motors faces and the respective solutions that have been taken by GM in order to neutralize the effects of these risks.

Global Corporate Finance 6313
Global Risk
Term Project
Dr John. R. Savarese
7/26/2012

In the fast moving business world, companies and firms are increasingly confronted with risk, risks that are complex and global. Emergence of new technology has made it possible for organizations and consumers to be exposed to the whole world on a scale that has not been seen before and at faster rates, hence exposing organizations to various risks; risks that may or may not be able to be anticipated or speculated or at times an organization might not be able to create solutions fast enough for these threats. Each organization is unique and operates in many areas of the world and will have risks that are both similar and different and each company may choose to mitigate the risks that may arise from vast operations differently. Organizations may choose to use one or more techniques to offset their risks, such as buying forward contracts, options, using tax incentives, etc. General Motors (GM) is a multinational organization, where they operate in countless countries over the world with assets, liabilities and sales; which is also vulnerable to risks associated with operating globally. Even though GM has filed for a Chapter 11 bankruptcy few years ago, it is today an active organization in the world. General Motors operates in 70 countries and have presence in over 200 countries (“GM Careers”, 2012). Evidentially the spread of General Motor’s operations makes it susceptible to numerous risks within the global market, where General Motors will have to anticipate and produce solutions to risks. Solutions are created through various arbitrage techniques and with intense market research that takes into account current and historical data; and as a result they are utilized to mitigate the risks. The risks are stated in the yearly report of General Motors as well as third party analysts, and some of risks are the following; exchange rate risk, commodity risk, inflation risk, labor risk, market risks, supply risks, and there are several more that can be noted. As any global organization GM is aware of the existence of these risks and the organization takes precautions according to the level of risk and the necessity of solutions for these threats. In order to understand the approach that GM employs to mitigate risk, this paper will focus on few of these risks; they are exchange rate risk, interest rate risk, counter party risk, commodity risk, legal risk, environmental risk and the risk that is associated with economic cyles. While some of the risks can have the same solutions, most will have to be neutralized by different methods. Exchange rate risk plays a key factor in the way organizations conduct their business. Since currencies, at least most currencies are at a float rate, there can be speculation and loss or gain in earnings when transferring the earnings from foreign currency to domestic currency. This is a risk that every global organization must deal with and discover a way to defuse the effects of the exchange rate changes. Exchange rate risk can cause exposures, such as transaction exposure, economic exposure and translation exposure; and if they aren’t managed properly the result can be a net loss for the organization. Transaction exposure is when the organization has already entered into financial obligation and the fluctuations in the rates presents a risk. Economic exposure is when the earnings of an organization are affected. Translation exposure is when assets and liabilities are affected due to exchange rate changes. General Motors is a company that sells automotive vehicles all around the world and has assets, such as manufacturing plants in strategic locations all over the globe; therefore GM is susceptible to all...
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