Hedging at General Motors Essay

3612 Words Apr 8th, 2012 15 Pages
Executive Summary

Being one of the largest automakers in the world, General Motors (GM) undertakes its manufacturing operations in over 30 countries with vehicles being sold in over 200 countries. Through undertaking its international operations it also subjects itself to various types of foreign exchange exposures due to fluctuations in the values of currencies; to manage this problem it has adopted a passive hedging policy and aims to reduce the impact of foreign exchange exposures on the business.

The first part of this report outlines the various types of foreign exchange exposures that GM can subject itself to and also outlines what methods can be used to reduce the risk associated with changes in the value of currencies; the
…show more content…
Using Financial Instruments to Hedge

Hedging through the use of financial instruments is whereby instruments such as forwards, options and money markets are used to manage the risk of foreign exchange exposure.
• Forward Hedges are where a contractual obligation exists regarding the buying or selling of a currency at a specified fixed future rate on a specified future date. It requires a source of funds (Eiteman, Stonehill and Moffett, 2010).
• Option Hedges are a right not an obligation to buy or sell a specified currency at a specific rate on a specified future date. It allows for speculation on the upside while still limiting the loss (Eiteman, Stonehill and Moffett, 2010).
• Money Market Hedges is another method, this contract is a loan agreement whereby a firm borrows in one currency and exchanges the proceeds in another currency (Eiteman, Stonehill and Moffett, 2010).

Natural Hedging

This type of hedging is whereby foreign exchange exposures in outflows of cash are offset by inflows of cash through matching of transactions (i.e. Revenues and Expenses). Natural hedging focuses on operating cash flows; for example a receivable is offset by a payable in the same currency without the use of financial instruments, this however requires consideration of synchronising values of the cash flow and timing of the cash flows (Eiteman, Stonehill and Moffett, 2010).

Strategic Decision making by MNE’s

There are various factors