Tess Duale, Jacob Entel, Matt Hammer, Blake Korman, Ryan Levine, Drew Miller

Agenda 1.Background 2.Hedging Policy 3.Transactional/Translational Exposure 4.Calculations for Canadian Dollar Exposure 5.Situation GM faces in Argentina

Background ●Founded in 1908 ●200 Countries ●World’s Largest Automaker ●Unit Sales = 8.5 million vehicles in 2001 ●15.1 Percent worldwide market share

Treasurer’s Office ●For Foreign Exchange, all of GM’s hedging activities were concentrated in two centers ●The Domestic Finance Group, located in New York ●The European Regional Treasury Center (ERTC) ●North America and Europe are largest markets

GM Corporate Hedging Policy Goals 1.Reduce cash flow and earnings volatility o Hedging cash flows and ignoring balance sheet exposures 2.Minimize the management time and cost dedicated to global FX management 3.Align FX Management in a manner consistent with how GM operates it automotive business o Financial management should map to the geographic operational footprint of GM

Passive Policy: Hedge 50% of Commercial Exposures ● Hedge 50% of all significant foreign exchange operational exposures ● Commercial (Operational) Exposure o Cash flows that deal with ongoing business  Accounts Receivable/Payable ● 4 Regional Centers ● Each Regional center collects monthly forecasts of total exposure ● Riskiness is then taken into consideration o Implied Risk = Regional Notional Exposure (AR-AP) x Annual Volatility of relevant currency pair ● Benchmark hedge ratio of 50%

Commercial Exposures Hedging Example

Derivative Instruments ● Exposure divided evenly over 12 months ● Months 1-6 (Hedge 50% in Forward Contracts) ● Months 6-12 (Hedge 50% in Option Contracts) o Flexibility ● At least 25% of combined hedges on particular currency has to be held in options

Rolling Over ● Started when exposures were not evenly spread out ● Balance of Forwards and Options were constantly changing ● Options had to make up 25% of the hedge position ● Since forecasts received by Treasury Group had been changing from month to month, these changing expectations caused for over- or under- hedged opportunities

Delta Basis ● Delta: How effectively the instrument would be exercised ● Forward Contracts: 100%, Option Contracts: 50% ● Average Delta = (50% x 100%) + (50% x 50%) = 37.5% 2 ● Tolerance of +/- 5% was allowed when matching actual port to benchmark

Commercial and Financial Exposures ●Commercial exposures include cash flows associated with the ongoing business such as receivable and payables ●Financial exposures include debt repayments and dividends

Commercial Exposures (capital expenditures) ●Planned investments that met either of the two following requirements: ○ amount in excess of $10 million ○ implied risk equivalent to at least 10% of the unit’s net worth ●Treated separated from ordinary exposures

Financial Exposures ●Cash flows, including loan repayment schedules and equity injections into affiliates ○ hedged on a case-by-case basis ○ structures to create as little FX risk as possible ○ 100% hedged using forward contracts ●Dividend payments ○ only deemed hedgeable once declared ○ hedged like ordinary commercial exposures (50% hedge ratio)

Why Not An Active Policy? ●GM had initially employed an active hedging policy “to minimize the management time and costs dedicated to global FX management” ●A passive policy was employed because it was determined that investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks

Transaction Exposure ●Transaction Exposure is the risk faced by companies in international trade that currency exchange rates will change after the companies have already entered into financial obligations ●Hard to predict foreign and domestic cash flows

Translation Exposure ●The exposure of a multinational corporation’s consolidated financial statements to exchange rate fluctuations ●If MNC’s subsidiary has earnings denominated in foreign currency, earnings must be converted to dollars at exchange rate as of the date of the statements

Translation Exhibit

Transaction v. Translation ●Translation adjustment gains or losses that arise from consolidating foreign operations do not change the parent’s cash flows ●One of GM’s main hedging policy concerns is reducing cash flow

GM-Canada ●GM-Canada is a vital part of GM’s worldwide production process ○ Sold Cars to Canadian Markets ○ Served as a core supplier GM operations in North America ●Accounting standards require subsidiaries of a multinational firm to choose a currency to be the functional currency ○ U.S. Dollar chosen as functional currency ○ GM-Canada has a large asset base in CAD ○ GM is short roughly 1.7 billion CAD

GM Canadian Exposure ●GM’s transactional exposure to the CAD is Billion CAD ○ Calculated by finding the difference between GM’s CAD inflows and outflows ●GM’s translational exposure is currently Billion CAD ○ Determined by finding GM’s net asset/liability position

GM’s Pre Tax EPS Effect

Argentinian Peso ●Argentina’s economy was in trouble ●Downgraded six grades below investment level ●Short-term default probability of 40 percent and medium term probability of 50 percent ●Default would lead to devaluation ●Could go from 1:1 to 2:1

ARS Consequences ●Devalue GM’s Argentina’s assets ●Export price of vehicles and equipment from Argentina would be reduced ●Reduction of cost of materials and labor which would lead to lower operating costs

ARS Devaluation Effects ●Net Exposure: Million ARS ●Currently ARS is trading 1:1 with USD ●If 2:1, SH’s Equity drops to million ARS ●Shareholder Equity will decrease shareholder equityby 50% ●$300m in liabilities increases to $600m

Hedging ARS Risk with Forward Contracts ● One-Month Forward Contract costs $6.4 million - Not Cheap ● Fast moving rates - not easy to lock in contract ● Forward contracts are rapidly rising due to economic instability in Argentina ● Suggest that GM purchase options instead of entering into forward contracts

Questions?