Evaluate Gm's Currency Hedging Policies Essay

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3. Evaluate GM’s currency hedging policies. [3 pages] {Gavin} {Ryan} The issue here may lie with the 50% to 75% hedge as it is doubtful as to why GM does not hedge its receivables / payables by 100%. Perhaps the issue is related to high costs of using options and their receivables / payables run into huge amounts. Additionally, GM is not keen on committing to a forward because they have positive expectations about the future exchange rate and the forward would only serve to limit their possible gains.

Inherency: Does the plan exist in the status quo (the way things are now), and what
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However by paying a small premium for an option, GM would be able to preserve the upside of any exposure. This is because an option gives them the right to choose whether to exercise it or not upon maturity. Hence, if the CAD dollar weakens against the USD, GM’s large Canadian assets and liabilities and payables owed to Canadian suppliers would weaken considerably. GM could then choose to exercise the option for a better exchange rate. Conversely, if the CAD dollar strengthens, then GM would choose not to exercise the option as their cash flows denominated in Canadian dollar is now worth more compared to the USD.

The level of risk adverseness plays a huge role because GM may be inclined to hedge all exposure using a forward if they are highly risk adverse. On the other hand, GM may be willing to pay a premium for an option to ensure the still receive the upside if they are not so risk adverse. This links to expectations on future spot rates and how GM anticipates the CAD to fluctuate vis-à-vis the USD in the coming months. If GM anticipates future spot rates of CAD/USD to weaken, it would prefer to buy a forward and the reverse holds true as well.

After conduction an analysis, it shows that the fluctuations in exchange rate could cause a lot of trouble for GM. Hence, it reverts back to the issue of GM’s expectations of the future spot exchange rate. From this, they can then determine which hedging method is more
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