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Group case study: Foreign exchange Hedging Strategies at General Motors.

1. A detailed description of the points. The functions of the GM Treasury

Department.

GM Treasury Department was concerned about the foreign currency exposures that required
significant risk management decisions. Mainly: what to do about GM’s billion dollar exposure to
the Canadian dollar and GM’s exposure to the Argentinean peso in light of the expected
devaluation in the months ahead.
Felstein and his treasury team were responsible for all of GM’s monetary transactions and for
managing the myriad risks associated with the timing of those transactions. They handled
everything, from investing excess cash from vehicle sales receipts to hedging currency risks when a
foreign subsidiary like Opel Austria announced it would remit a dividend to the worldwide parent
company. They invested heavily in people, rotating them through functional positions and offices
around the world, developing their skills and experience.
One of the key functions of the Treasurer’s Office was financial risk management. This included
management of not only market risk (foreign exchange, interest rate and commodities exposures)
but also counterparty, corporate and operational risk.
All of GM’s financial risk management activities were subject to oversight by the Risk Management
Committee, which was composed of six of GM’s most senior executives including Feldstein. They
met quarterly to review the performance of GM’s financial risk management strategies and to set
treasury policy for GM and its subsidiaries.
For foreign exchange, all of GM’s hedging activities were concentrated in two centers:
 The Domestic Finance group in New York handled FX hedging for GM entities located in
North America, Latin America, Africa and the Middle East.
 The European Regional Treasury Center (ERTC) was GM’s largest foreign exchange
operation, covering European and Asia Pacific FX exposures.

In managing the FX exposures, both the Domestic Finance group and the ERTC worked closely
with other groups within Treasury that had the primary responsibility of providing strategic
support to GM entities within that region. These groups were also the global coordinators for
intercompany
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de La Rioja (UNIR) moved cash around the world to finance overseas mergers and acquisitions
activities, and managed dividend repatriations.

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2. An analysis of the corporate hedging policy.

In his analysis, Feldstein paid particular attention to the transactional and translational
consequences of the CAD exposure, the choice of instruments he could use to implement any
deviations and possible responses to the worsening situation in Argentina.
General Motor’s overall foreign exchange risk management policy was established to meet three
primary objectives: (1) reduce cash flow and earnings volatility consisting of hedging cash flows
(transactional exposures) only and ignore balance sheet exposures (translation exposures)., (2)
minimize the management time and costs dedicated to global FX management was consequence of
an internal study which determined that investment of resources in active FX management had not
resulted in significant outperformance of passive benchmarks, and (3) align FX management in a
manner consistent with how GM operates its automotive business reflected a belief that financial
management should somehow map to the geographic operational footprint of the underlying
business.
The policy adopted was generally a passive policy: Hedge 50% of commercial (operating)
exposures. This was implemented on a regional level. They differentiated between
“commercial” exposures (cash flow associated with the ongoing business such as AR and AP=
this provided GM executives with granular information about the currency exposures created by
ongoing business operations. The formula to apply: Implied risk = Regional notional exposure x
Annual volatility of relevant currency pair) and “financial” exposures, such as debt payments
and dividends. They were structured so as to create as little FX risk as possible; they were also
100% hedged using forward contracts. Dividend payments were only deemed hedgeable once
declared, and even then, were hedged in the same manner as ordinary commercial exposures.
Translation (balance sheet) exposures. They were not included under GM’s corporate
hedging policy.
Accounting treatment: one of the goals was to reduce earnings volatility. If the requirements for
hedge accounting were met, the earnings volatility would be neutralized by taking gains and losses
on the hedges to a shareholder’s equity account in the balance sheet pending the realization of
gains and losses on the underlying hedged exposures.
Reporting: Hedging activities were closely tracked and regularly reviewed within the Treasury
Group. The information was made available to senior management and to the Risk Management
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Committee to assist in policy review and creation.

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3.Assessment of the policy of hedging 50% of operational trade risks.

PROBLEMS THAT CAN DERIVATE – ASSESMENT:

- The main problem with GM's hedging policy is that risk exposures are managed on a regional
basis rather than through a globally centrally managed risk hedging policy. Protection should be
centralized, as this allows GM to pay and receive most of the foreign exchange in an internal
reconciliation of foreign inflows, as well as outflows and foreign currency balances.
- This is not a good hedging policy as 50% of trades remain unhedged, exposing GM to trade
exchange rate risk. Translation risk is not hedged, but this will also affect their financial
statements, so this risk should be hedged using the concept of matching. For example, GM should
seek to create foreign liabilities that match foreign assets, or vice versa. This way they can avoid
translation risks without spending money on hedging tools.
- GM's hedging policy does not hedge translation risk, which is another disadvantage of the policy,
as failure to hedge translation risk may also adversely affect GM's financial performance for any
financial period.
- They expose the company to 50% trading risk; this policy should be modified to cover 100%
trading risk.
- The criterion of only hedging high-value trades is another missing point, as hedging decisions
should be based on the volatility of the underlying foreign currency, and if more trades are in
highly volatile foreign currencies, they should be hedged to avoid exchange rate risk.
4.A critical evaluation from page 2 to page 12. The strengths and weaknesses of the
organization.

Strengths
- GM has a strong position in the automotive market, more that 100 year of operations,
world’s sales leader.
- Manufacturing operations EUA, Argentina, Canada, Brazil, Mexico and South Korea
Weaknesses
- GM is a transnational company that faces trade barriers, labor, production cycles, and
diversification of services for shareholders.
- Company has a non-centralized treasury function
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- GM policies must be analyzed because of exchange risk on the balance sheets
- GM Canadian functional currency was the U.S dollar
- The passive policy hedge 50%.
Opportunities
- The translational risk can be minimized by borrowing in local currency
- International operations are growing

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- Japanese Auto market

Threats
- Exchange risk based on political, economic and technology to predict volatility/uncertainty.
- Argentina increasing macroeconomic uncertainty.

5.A critical evaluation how the GM Treasurer and Vice President of Finance intend to
implement currency hedging.

In the case of Canada, the problem is that General Motors is even more aware of problems that
could negatively affect the company at the end of the fiscal year. The GM-Canada relationship is
one of such synergy that there is no conflict with respect to the company using the US dollar as its
currency. However, it is at the moment of seeing the liabilities in the balance of payments that the
conflict arises and hedging must be incurred to face the liabilities denominated in Canadian
dollars.
The problem with Argentina is more complex due to the precarious situation in which its
economy finds itself, with the risk of default and the consequent non-payment of debts. GM is in
the dilemma of how to carry out the corresponding foreign exchange coverage to protect itself from
a possible bankruptcy of the Argentine government and, due to this, with the fact that they do not
fulfill their promises to pay debts to the company.
CANADA
1. One of the alternatives would be to maintain the corporate coverage policy: cover 50% of
commercial exposures in the following 12 months, with forward contracts and options.
STRENGHTS: continue operations within the company as usual, as has been done until now, and
maximize profits in the event of an increase in the exchange rate.
WEAKNESS: leaving uncovered the translation exposure derived from the net monetary liability of
2.1 billion. In addition, continuing with this policy minimizes losses in an increase in the exchange
rate.
2. Another alternative would be to modify the coverage policy, increasing it to 75%.
STRENGHTS: reduction of the volatility of profits, derived from the exchange rate. More coverage.
Minimizes the impact on losses due to an increase in the exchange rate. More accurate prediction
of the de
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La Rioja (UNIR)
WEAKNESS: Minimizes profits in the event of an increase in the exchange rate.
3.A third alternative would be to generate a new coverage policy, considering new variables such as
sensitivity analysis of movements in exchange rates, projected cash flows after taxes, net monetary
liabilities in CAD and impact on earnings per share volatility. Of the company, exploring other
financial instruments that are better adapted.
STRENGHTS: reduction of expenses for payment of financial instruments.

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WEAKNESS: Quite a long learning curve for the entire company, therefore evaluating the new
coverage performance would take more time.
CANADA SOLUTION: the best option would be to shift the hedging policy towards 75%, in order
to reduce the volatility of profits generated by the exchange rate that could occur in the future close
to the end of the fiscal year with respect to the Canadian dollar to the US dollar. By having a wider
margin, the results could be predicted with greater certainty than if the 50% coverage were
maintained. Given that the exposure is 1700 million, an exchange of 0.003 CADs less for US dollars
is already 5.1million loss in buying power. The exposure is too great to leave unchecked. The
instrument that would work cheaper than the options would be money market hedging, for
example.
ARGENTINA
1. Cover the exposure to the Argentine peso with the combination of derivative instruments in the
financial markets with forward contracts and options.
STRENGHTS: continue operations within the company as usual, as before; monitoring would
remain in force.
WEAKNESS: the cost of covering an exposure of 300 million dollars is very high, the renewal of
short-term contracts or the purchase of one-year contracts increases as the time horizon / period of
coverage increases.
2. Choose options only as a hedging instrument, because if the Argentine peso is expected to
devalue, you can choose an option with a short exposure to cover the risk of exposure to possible
devaluation.
STRENGHTS: it would act as an insurance and will stop the losses. If the price falls below, the
option can be exercised and, at the same time as hedging, profits would be generated by the
company.
WEAKNESS: If the Argentine peso does not fall, the option would not be exercised, however the
company had already had to disburse the payment.
3. Reconstruction of the hedging policy through different hedging methods: use natural
commercial hedges or innovative strategies to reduce assets denominated in pesos and replace
liabilities denominated in pesos with those of other currencies.
STRENGHTS: reduction of expense for payment of financial instruments. Innovation by the
company
Universidad Internacional de Lathrough the use of instruments other than derivatives.
Rioja (UNIR)
WEAKNESS: monitoring and results may not be favorable at first, which would increase the risk
linked to the possible devaluation of the Argentine peso. Quite a long learning curve for the entire
company, therefore evaluating the new coverage performance would take more time.
ARGENTINE SOLUTION: Reconstruction of the coverage policy and reconsider its methods. In
this way, innovative strategies are carried out that can replace the liabilities denominated in pesos
and reduce the assets of this same currency so as not to be so tied to the fluctuations of an

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unpredictable, volatile currency with a tendency to go into default without the possibility of
recovering the investments.

Bibliography
Bruno, S. ( 2016 , November 21). The Benefits of a 50% Currency Hedge. From Think Advisor:
https://www.thinkadvisor.com/2016/11/21/the-benefits-of-a-50-currency-hedge/
Döhring, B. (2008, January). Hedging and invoicing strategies to reduce exchange rate exposure: a
euro-area perspective. From Economic Papers 229.:
https://ec.europa.eu/economy_finance/publications/pages/publication11475_en.pdf
INVESTOPEDIA TEAM . (2022, April 06). A Beginner's Guide to Hedging . From Investopedia:
https://www.investopedia.com/trading/hedging-beginners-guide/
Richard Rubak, A. S. (15 December 2003). DELL'S WORKING CAPITAL. Harvard Business School .
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ENVIRONMENT .
UNIR. (2021). UNIT 7. FINANCIAL RISK MANAGEMENT AND DERIVATIVES. PART I . Tratto da
FINANCE IN A DIGITAL ENVIRONMENT.
UNIR. (2021). UNIT 8. FINANCIAL RISK MANAGEMENT AND DERIVATIVES. PART II. Tratto da
FINANCE IN A DIGITAL ENVIRONMENT .
UNIR. (2021). UNIT 9. INTERNATIONAL FINANCE AND ITS RELATIONSHIP WITH THE ECONOMY.
Tratto da FINANCE IN A DIGITAL ENVIRONMENT.
Veblen, M. A. (2006). Foreign Exchange Hedging Strategies at General Motors: Transactional and
Universidad Internacional deTranslational
La Rioja (UNIR) Exposures,. HARVARD BUSINESS SCHOOL.

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