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 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 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. 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

Calculation

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.

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.