Foreign Exchange Hedging Strategy at General Motors Transactional and Translational Exposures

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Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposure Problem Statement In September of 2001 General Motors (GM) was faced with a billion dollar exposure to the Canadian dollar. At the time, North America represented approximately three-quarters of GM’s total sales and this large exposure to the CAD could significantly affect GM’s financial results. GM had a passive strategy of hedging 50% of its exposure; this paper explores the impact of hedging 75% of the exposure. Additionally, GM faced a unique problem in Argentina, which was at risk of defaulting on its international loans. A default would also cause the Argentine Peso to be devalued from 1 peso to 1 dollar to 2 pesos to 1…show more content…
2. To minimize the management time and costs dedicated to global foreign exchange management Foreign exchange management could take hours and hours of management time in order to create an effective policy, and can also be seen as a time waster. GM is trying to reduce the amount of time and money it spends in this area by employing a passive foreign exchange strategy. GM conducted an internal study that determined that the investment of resources in an active foreign exchange management scenario did not result in any remarkable outperformance of passive targets from years past. 3. To align foreign exchange management with the firm’s core automotive business Tailgating on their second objective, GMs foreign exchange management has adopted a passive policy, which states that they will hedge 50% of all significant foreign exchange commercial exposures on a regional level. This includes GM operations in North America, Europe, Asian Pacific, Latina America, Africa, and the Middle East. Each of these regions has a treasury center that is required to use particular derivative instruments over a specified time allotment. The guidelines for this policy are laid out as follows: …forward contract to hedge 50% of the exposures for months one through six and options to hedge 50% of the exposures for months seven through twelve. In general, at least 25% of the combined hedge on a particular currency is to be held in options in order to assure flexibility…

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