Foreign Exchange Hedging Strategies at General Motors
FX Hedging:10 Common Pitfalls
A Structured Approach to Financial Risk Management
Executive Summary
1 Unclear Risk Management Objectives
3 Absence of Appropriate Performance Benchmarks
The design and implementation of an effective FX risk management
In order to design an effective FX hedging strategy, it is
With almost any business activity, performance
necessary to know exactly what the strategy is intended
measurement is essential to determine the effectiveness
to accomplish. While this may appear to be self-evident,
of a chosen strategy. If a company’s marketing department
volatility experienced in the foreign exchange markets over the past
the process of determining a company’s FX hedging
designs a new advertising campaign, the impact of that
couple of years has highlighted the need for large and small businesses
objectives is not always as straightforward as it sounds.
campaign on future sales will be closely monitored to
Stating a simple objective, such as “protecting the business
determine whether the campaign should be continued.
from FX volatility” may be stating the truth, but it is not
And just like the decision to launch a new advertising
specific enough to effectively guide the design and
campaign, the determination of an FX hedging strategy is
implementation of an FX hedging strategy. Is the goal to
a key strategic decision, which can have a material impact
protect the balance sheet or the P&L? Should accounting
on a company’s bottom line. As such, it is important that
results be prioritised over cash flow impacts? What is the
a system is in place which allows the performance of the
relevant time horizon? These are the types of questions
hedging strategy to be measured.
strategy can be a challenge for many businesses. The extreme level of
to carefully consider their FX hedging requirements, and whether their current hedging programs are sufficient to
A Structured Approach to Financial Risk Management
Executive Summary
1 Unclear Risk Management Objectives
3 Absence of Appropriate Performance Benchmarks
The design and implementation of an effective FX risk management
In order to design an effective FX hedging strategy, it is
With almost any business activity, performance
necessary to know exactly what the strategy is intended
measurement is essential to determine the effectiveness
to accomplish. While this may appear to be self-evident,
of a chosen strategy. If a company’s marketing department
volatility experienced in the foreign exchange markets over the past
the process of determining a company’s FX hedging
designs a new advertising campaign, the impact of that
couple of years has highlighted the need for large and small businesses
objectives is not always as straightforward as it sounds.
campaign on future sales will be closely monitored to
Stating a simple objective, such as “protecting the business
determine whether the campaign should be continued.
from FX volatility” may be stating the truth, but it is not
And just like the decision to launch a new advertising
specific enough to effectively guide the design and
campaign, the determination of an FX hedging strategy is
implementation of an FX hedging strategy. Is the goal to
a key strategic decision, which can have a material impact
protect the balance sheet or the P&L? Should accounting
on a company’s bottom line. As such, it is important that
results be prioritised over cash flow impacts? What is the
a system is in place which allows the performance of the
relevant time horizon? These are the types of questions
hedging strategy to be measured.
strategy can be a challenge for many businesses. The extreme level of
to carefully consider their FX hedging requirements, and whether their current hedging programs are sufficient to