Foreign Exchange Hedging
Strategies at General
Motors Critique
Luke Bennrubi
Britten Feldman
Hillary Felice
Drew Ferwalt
Overview
❏ Review important topics
❏ Discuss material covered well
❏ Cover material missed
GM Hedging Policies
 Commercial (Operating) Exposure: Volatile currencies
are hedged for only 6 months and risk threshold
lowered to $5 million from $10 million
 Commercial (Capital) Exposure: Amounts in excess of
$1 million not $10 million (typo)
 Accounting Policies: Held gains and losses from
hedging in shareholder’s equity account
 Reporting: Hedging activities closely tracked; policy
lead to passive switch
GM Hedging Policy Objectives
❏ Reduce cash flow and earnings volatility
❏ Minimize the management time and costs
dedicated to global FX management
❏ Align FX management in a manner
consistent with how GM operates its
automotive business
Passive vs. Active Hedging
❏ Currency exposure is inevitable when doing
business in foreign markets
❏ Passive Hedging
❏ Uses forward/options contracts (0-100%)
❏ Protects against exchange rate volatility
❏ Active Hedging
❏ Managers exploit inefficiencies in market
❏ Fundamental, technical, dynamic, option-based
“The second objective was a consequence of an internal study that determined
that investment of resources in active FX (foreign exchange) management had
not resulted in significant outperformance of passive benchmarks.”
Transactional Exposure
❏ Definition: Gains and losses when transactions
are settled in currency other than reporting
currency
❏ Stem from many different things
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Buying activities
Selling activities
Financing decisions (borrowing)
Translational Exposures
❏ Definition: Gains and losses that arise when
assets and liabilities are translated back into
reporting currency
❏ Determined by functional currency
❏ GM does not hedge translational exposures
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Generally not large enough
When large enough, senior finance executives
are notified
Canadian Exposure
 Large Canadian dollar assets and liabilities
 Supplied GM operations in N. America
 Relied on U.S. based supplies
 Functional currency set as USD
 Translational exposure
Effect on Pretax EPS
What is the effect on GM’s pretax EPS if the CAD appreciates to
1.5291? What if it depreciates to 1.6269? Again, please show
exactly how you came up with these numbers.
1. When the CAD appreciates, EPS declines and when the CAD
depreciates, EPS rises.
2. EPS, not cash EPS
3. The best way to identify the earnings effect from the set of
given information is by quantifying a +/-3.1% change in
Shareholder’s Equity .
1. Assets - Liabilities = Shareholder’s Equity
Calculation
GM in Argentina
If the ARS is devalued to 2.00, what will be the
net effect on GM?
1.
The functional currency should use ARS because the economic effect of XR changes of the
overseas operating unit is relatively self contained and integrated within Argentina.
2. G/L from translation adjustment from consolidating foreign to the parent doesn't directly affect
cash flow. It directly affects owners equity.
Hedging ARS Exposure
● There is a serious risk that the devaluation will cause
Argentina to default on its debt
● Forward contracts are priced as they are because of the
economic instability in Argentina.
● GMA can borrow in ARS to offset its risk.