1. Foreign Exchange Hedging Strategies at General Motors Critique
Luke Bennrubi
Britten Feldman
Hillary Felice
Drew Ferwalt

2. Overview Review important topics Discuss material covered well
Cover material missed

3. 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

4. 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

5. 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.”

6. Transactional Exposure
Definition: Gains and losses when transactions are settled in currency other than reporting currency
Stem from many different things
Buying activities
Selling activities
Financing decisions (borrowing)

7. 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
Generally not large enough
When large enough, senior finance executives are notified

8. 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

9. Effect on Pretax EPS
What is the effect on GM’s pretax EPS if the CAD appreciates to ? What if it depreciates to ? Again, please show exactly how you came up with these numbers.
When the CAD appreciates, EPS declines and when the CAD depreciates, EPS rises.
EPS, not cash EPS
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 .
Assets - Liabilities = Shareholder’s Equity

10. Calculation

11. GM in Argentina
If the ARS is devalued to 2.00, what will be the net effect on GM?
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.
G/L from translation adjustment from consolidating foreign to the parent doesn't directly affect cash flow. It directly affects owners equity.

12. 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.
They are priced as they are because of the uncertainty of future spot rates. For translational risk GMA can borrow in ARS to net off the foreign debt.
Options are generally better than forward contracts for hedging in an unstable economy.