Financial Risk Management Case Study: GM's Foreign Exchange Risk

This case study examines General Motors' (GM) exposure to foreign exchange risk arising from its international operations and transactions in various currencies. It emphasizes the importance of hedging policies for companies seeking to protect financial transactions. The study focuses on two key scenarios: transactional and translational exposures, with a detailed risk management structure and the impact of accounting rules on hedging policies. GM's foreign exchange risk management policy aims to reduce cash-flow volatility, control costs, and minimize time related to foreign exchange management. The case analyzes hedging options for the Canadian dollar and the Argentinian peso, considering forward rates, options, and borrowing strategies. The analysis explores different hedging ratios and the implications of currency devaluation, offering insights into effective risk mitigation techniques for international businesses. The case study uses the concepts of forward rates, options, and borrowing to offer effective risk management solutions. The study recommends various hedging strategies, including forward contracts, options, and long-term forex swaps, to mitigate risks associated with currency fluctuations. The case study provides an overview of the key concepts related to financial risk management.

Financial Risk Management

TABLE OF CONTENTS
Introduction............................................................................................................................1
Hedging of risk analysis ........................................................................................................2
REFERENCES................................................................................................................................3

Introduction
The case study is all about exposure of General motors to determine foreign risk that
arises because of its presence at different parts of geographical areas. It represents transactions in
different foreign currencies. Hedging policies is important for companies which are trying to
protect the exchange of financial transaction in home currency or outside currencies. There are
mainly two important cases which are discussed in this case study. The matters need specific
consideration as current policy is not very much common to mention two matters such as
transactional and translational exposures. Complete study focuses on risk management structure
and impact of accounting rules on the hedging policies.
It has been found that GM was the international top most auto makers company with the
net sales of 8.5 million vehicles. It has around 15.1% of total market share. Its manufacturing
operations are in more than 30 countries. Overall foreign exchange risk management policy was
developed to fulfil the major three main objectives. Reduction of cash-flows and attain volatility,
control and minimise time and costs related to foreign exchange management. (Horcher, 2011).
The first target of intended decision is based on hedge cash-flows only without making
any changes in balance sheet. The other one is related with internal study that determines the
total investment of resources in active foreign exchange market. With the changes in policy
passive methods are replaces with active one. The last one relies on a believe system that FM
should manage current geographical operations with underlying instrument The other situation is
related with exposure to FX risk that are develop from Canadian subsidiary that has operated in
USD. Two types of risks are related to these are:
Transaction risks: These are those exchange risks related with the time delay among
entering into a contract and settlement. It is used to overcome risk through using various
instruments that are required to be analysed for several hedge ratios as well as favourable and
adverse situations.
Translation risk: This risk was related with Argentinian peso which is affected because of
recent devaluation in the local currency. Certain plan is needed to control these risks.
1

Hedging of risk analysis
According to maintained case, it has been observed that risk in financial transactions can
be controlled through using various options and instruments.
Canadian dollar hedging: After making proper analysis, it has been found that forward
rates contract is the best option. The major limitation with this contract is that it is considered to
be valid and so, company has an option to take benefits of favourable movements (Hull, 2012).
Few other hedging policies for Canadian dollar risks are determined. Both forward and option
can be the effective option available with the company. It will help to reduce total cash paid to
suppliers in cash of 1.7million. In that process, firstly analysed the more effective hedging option
on 50% ratios thereafter, total cost paid is separate among75% to 50% hedge ratio.
The Argentinian peso: Under this scenario, the case is much different from the above
one. The government of Argentina is facing financial issues which leads to increase debts.
Because of bad economic situation with no any reform and current devaluation of currency has
made the managers to implement new plan that should overcome this situation. They need to
decide the best hedging option that can help in these conditions. If devaluation rate is very fast,
long term strategies can be the best option. Government is having power to put restriction on the
level of payment with this investment. Other options are related with the borrowing which are
interact in local currency. Another way to protect is by using long term ferox swap option.
2

REFERENCES
Books and Journals
Horcher, K. A., 2011. Essentials of financial risk management (Vol. 32). John Wiley & Sons.
Hull, J., 2012. Risk management and financial institutions,+ Web Site (Vol. 733). John Wiley &
Sons.
3