Essay about General Motors Risk Management Policy

975 Words Nov 24th, 2010 4 Pages
What was the stated objective of General Motors Risk Management policy?

Three primary objectives:

1) Reduce cash flow and earnings volatility – this means management hedges the company’s transaction exposures and deliberately pays no attention to any balance sheet exposures or translation exposures.

2) Minimize the management time and costs dedicated to global FX management – this is as a result of an internal study that determined that the investment of resources in active FX management had not resulted in significant outperformance of passive benchmarks. An active approach was implemented.

3) Align FX management in a manner consistent with how GM operates its automotive business – this was an effort to plan to the
…show more content…
Additionally, there would be an impact on the value of outstanding contracts, labor rates, cost of goods sold, and decrease in sales, profit margin and decrease in market share

GM’s current hedging policy was 50% on the CAD 1.7 billion cash flow exposure that was projected of 12 months. The proposal was to increase the hedged amount to 75% which was the maximum allowed on GM’s policy.

I support the proposal for the following reasons:

1) Historically seeing CAD denominated supplier payments higher than CAD denominated sales 2) Increasing the hedging ratio to 75% would reduce the CAD/USD exchange rate 3) Increasing the hedging ratio to 75% would reduce the unpredictability of global earnings 4) Increasing the hedging ratio to 75% would reduce EPS unpredictability

In terms of translation risk, one possibility to mitigate the risk would be to select a spot rate or an exchange market price at which the value of the assets in CAD (2,597 per exhibit 9) could be sold.

Argentina and the Peso

A primary sources of transactional risk in Argentina is the widespread inflation. The government maintained a peg to the U.S. dollar at USD 1: ARS 1, however, the 2001 “zero deficit” law put Argentina at risk at defaulting on its debt; a debt to GDP ration of 45%; $16.5B.

The short term possibility that Argentina would default on its debt had reach 40% and in the medium term it reached 50%. A default would result