Foreign Exchange Hedging Strategies Harvard Case Solution & Analysis

Foreign Exchange Hedging Strategies Case Solution

Introduction

General Motors is the one of the largest automobile company in the world. The company made a record in 1931 by generating maximum sales target in the overall industry. It is still leading the market. In 2001, the sales were 8.5 million vehicles. The market share is 15 % worldwide. General Motors has assembled its plant in more than 30 countries. It gained revenue from different countries that cover every continent up to 200 countries. In 2000, the revenue was about 4.4 billion. General motor is concerned about the credit risk associated with the currency. To calculate the risk, the company had to make two alternatives that best suit the condition and circumstances within the company.

The case is related to competitive exposure. There are three approaches adopted by General Motors. The first approach is laid on the competitive exposure against the currency Yen, as described by General Motors. The second part is related to the competitive exposure that has been faced by General Motors till 2005,which defines the quantified and qualitative exposure.

General Motors is facing high level of risk related to currency. The reason behind is the inherent limitation in terms of geographical representations in numerous countries. The company’s operation is based on non-centralization treasury function, which focuses on different tasks and promotes them centrally. General Motors would have to take the step in order to centralize its treasury environment. This improves the efficiency and effectiveness of the business operations. Its hould have created the best profitable results based over USD by implementing the net-off strategy.

General Motors set 50 % to hedge the risk with the help of hedge ratio the level of volatility can be analyzed. The ratio should be set at 75 % because it gives precise result. It will be beneficial for the commercial transaction. They need to borrow a local currency so that the translation risk can be minimized as would net-off the overall risk. The currency leads to high volatility in order to change the economic factor of other country.

With the help of hedging instrument, forward rate contract can be mitigated by translation risk. The options would become more suitable as this gives better result to the company. The choice will become suitable in two conditions; when there is high volatility in the overall market and when exchange rate varies..................

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