General Motors Competitive Exposure

Topics: United States dollar, Exchange rate, Currency Pages: 24 (4377 words) Published: September 10, 2014

Types of Risks Faced by GM3
Transaction Risk3
Translation Risk3
Why do Companies Hedge?3
2. COMPETITIVE CURRENCY EXPOSURE AT GM (2001: Using Case Info)3 2.1 Performance6
2.2 Automobile Market in USA7
2. 3 Competitive Exposure Mechanism8
2.4 Yen Exposure Quantified9
4.1 GM’S US Car Sales Exposure14
4.2 GM’S Market Share Exposure15
4.3 GM’S Net Income Exposure16
4.4Implication of result on hedging strategy17
5.1 Issue in measuring quantifying exposure using regression19 5.2 GM’s Unit Sales Exposure (Worldwide)19
5.3 GM’s Auto Revenue Exposure (Worldwide)21
5.4 Moving to a net income like exposure22
5.5 Hedging the resulting exposure23

General Motors is a large multinational enterprise with operations in more than 200 different countries. It is an American multinational automotive corporation headquartered in Detroit, Michigan and the world's largest automaker (2001). It employs 365,000 people in every major region of the world. It produces cars and trucks in 30 countries, and sells and services these vehicles through the following divisions/brands: Buick, Cadillac, Chevrolet, GMC, Opel, Vauxhall, and Holden, as well as two joint ventures in China. Types of Risks Faced by GM

Transaction Risk
The exchange rate risk associated with the time delay between entering into a contract and settling it. The greater the time differential between the entrance and settlement of the contract, the greater the transaction risk, because there is more time for the two exchange rates to fluctuate Transaction risk creates difficulties for GM as it was dealing in different currencies; due to exchange rates fluctuate significantly over a short period of time. This volatility is usually reduced, or hedged, by entering into currency swaps and other similar securities. Translation Risk

This is the exchange rate risk associated with companies that deal in foreign currencies or list foreign assets on their balance sheets. The greater the proportion of asset, liability and equity classes denominated in a foreign currency, the greater the translation risk.

Why do Companies Hedge?
To reduce transaction costs.
Since individual investors can hedge on their own, why should a firm do so? A firm can likely hedge more efficiently than an individual investor To provide for future investment needs
To manage earnings
To speculate
To make evaluating a company’s operations easier
To make the comparison of the foreign subsidiary operations easier

2. COMPETITIVE CURRENCY EXPOSURE AT GM (2001: Using Case Info) During 2001, General Motors was world’s leader in automaker industry. At 8.5 million vehicles, GM enjoyed a market share of 15% and annual sales of 5184.6 billion over which it made earnings of 54.4 billion. Besides its automotive LOB, which was responsible for manufacturing and selling SUVs, sedans etc, the company had automobile financing and division, which had annual sales of $ 24 billion in 2001 and earnings of $ 1.6 billion1. The company sold its cars in 200 countries and had its manufacturing operations in 30 countries. Due to its international operations (it covers more than 25% of its sales from outside US); it had organized its main automotive division into 4 geographic divisions: a) GM North America

b) GM Europe
c) GM Asia Pacific
d) GM Latin America/Africa/Middle East

GM Segment Breakdown of Sales to end customers 2000:-

GM Geographic Breakdown of Net Property 2000:-

Based on sizeable foreign operation, the company encountered significant amount of currency risk. It estimated that liability due to instrument with foreign currency exposure was $13 billion 2000. GM garnered a variety of...
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