Running head: FLACTUATIONS IN MARKET INTEREST RATE GM COMPANY 1

Fluctuation in Market Interest Rate GM Motor

Name

Institution Affiliate

Course

Tutor Name

Date
FLACTUATION IN MARKET INTEREST RATE GM MOTORS 2

Question 1

General Motor is an Auto Manufacturer that operate in very competitive industries

dominated by other companies outside the United states. As of 2017, the company held 17%

of the market share in the United States while it holds fourth position in the whole world with

5.8% market share. The local and global market is highly competitive due emerging

technologies and trends. For a company to survive it must invest heavily in research and

development of new model that is economical and environmentally friendly.

According to the 2017 financial report General Motor Company deals with highly

competitive market that is characterized by excess manufacturing capacity and introduction

of new model by the competitors. Moreover, most of the company competitors are from

foreign countries who can manage to produce the same quality of the automobile at lower

cost. The company notes that China and India are becoming key emerging market that have

the capacity to produce high quality vehicles at low price due to availability of cheap labor.

In recent day there has been a boom in autonomous vehicle and electric cars, General

motor had invested heavily in research and development for new electric cars. In from 2015

to 2017 the company invested $6.5 billion, $6.6 billion and $7.3 billion respectively in

research and development of new car model. The main competitors for the company still

remain; The ford motor, Toyota and Volkswagen Group.

Question 2

Interest rate risk can be defined as value of fixed assets income will suffer as result of

fluctuation in the interest rates. The interest risk affect interest bearing assets such as bonds or

loans due to variability of the interest rates. In addition, the variable of the interest rates

affects the return in investment projected by the company.

According to 2017 financial report, General Motors is faced with foreign exchange

and interest rate fluctuations. The risk is extremely difficult to mitigate since it is influenced
FLACTUATION IN MARKET INTEREST RATE GM MOTORS 3

by the external factors such as government regulation. The company is more susceptible to

change in interest rate related to financial instruments such as debt, capital lease and other

marketable securities as a result of fluctuation of interest rate has a significant impact on the

company net interest income from finacial assets and other marketable securities.

In order to mitigate against the interest rate risk, the company prefer the fixed interest

in all the borrowing since variable interest rate are subject to various adjustment to reflect the

prevailing market condition. The adjustment may have an adverse effect on the company

profitability. However, since most of the interest rates are variable General Motor Company

uses derivatives instruments such as swaps and caps to mitigate against the variation of the

interest rates.

Question 3

Since the change of the interest rate is very sensitive in some market around the world

the company measures the changes in interest income by the change of interest rates using a

hypothetical 100 basis in all interest rates across all maturity. In 2016 to 2017 the interest

income increased from -$43.9 in 2016 to %19.4 in term of one hundred basis points

sensitivity. However, the analysis was estimate of the effect hypothetical interest rates but the

actual number could be different. The falling interest rates was a better indication that the

interest income was expected to decrease however that was not the case.

Question 4

Since the changes of the interest rate and exchange rate are the major risk associated

with the international business the company use forward contracts that have been designated

as cash flow hedges. Cash Flow hedge is an investment position taken by company or an

investor with the aim of offsetting the potential impact of a specific risk. In 2016 and 2017

GM used interest rates swaps amounting to $3,070 and $2,177 respectively as cash flow

hedges. In addition, the company used 1571 in 2017 as foreign currencies cash flow hedges.
FLACTUATION IN MARKET INTEREST RATE GM MOTORS 4

When a company uses cash flow hedges, the designated position of the changes in the

fair value of the cash flow hedged is deferred in accumulated other comprehensive loss and

recognized in the company financial interest.