Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures Harvard Case Solution & Analysis

Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures Case Solution

Question 1

From the following analysis, it is concluded that General Motors hedged two types of exposures in order to minimize the risk loss caused by an economic fluctuation. The first exposure consisted of the commercial hedge where it hedged 50%-75% of the rolling over receivables/payables, which seems that it was trying to minimize the risk through the proper flow of transactions in a business.

However, the exposure comprised of 1 to 12 months and it showed the variability over the changing results. It also showed that an extended period of time would continuously decrease the risk due to the fact that there was an uncertainty of high economic downturn. Basically, an exposure indicates the transparency level of how such things are performing, and tend to have an impact over the economic situation in the future.

The other internal exposure they concluded was the ARS exposure, which shows the differentiated results of a particular balance sheet by analyzing in terms of two currencies (Peso and US dollar). However, such exposure was based on the predicted 50% and 75% hedged ratio as well as it included the time horizon of how such fluctuations which would occur due to the changing period.

Finally, through the analysis, it was determined that the economic exposure was calculated in order to know the transparency level of the particular economic results. Where the Japanese market suffered from currency devaluation and decreased the overall profits of General Motors, thus this case is one of the most important cases to consider as it is the baseline of how such risk would be minimized through the suggested hedged ratio, which has to be performed at a considerable period of time and to allow the operations to manage the things under control in order to minimize the risk of loss, which would occur during the particular period of time. With the economic downturn in Argentina and Japan, it is said that General Motors should critically focus on the exposure level to analyze the root cause of how such things would take place in the future if they would not apply the hedging activities overtime.

Question 2

The reason to perform the hedging analysis is to determine the transparency level of how the impact of changes in currencies would have on the economic situation. Therefore, from this case, it was analyzed that General Motors was considering a transactional and translational exposures because of the threats that the country might negatively affect an entire operational activities of the business due to the currency devaluation, which would not be able to increase the sales as well as the profit margins in the near future.

Therefore,according to the analysis, it can be seen that hedging would only be a factor to disclose the information regarding the threats, which would be faced by the company if they would use regular currency exchange or trade in spot prices. Under this case, the economic position of Argentina was deteriorating through currency devaluation and high interest rates.

It can also be seen that the company was facing the currency risk through geographical representation in the number of selected countries. On the other hand, the company also had a poor non-centralized treasury structure that relied on the local currency instead of fixing towards the default one.

The importance of hedging activity clearly illustrates that the company should manage its operations under centralized treasury function, whose responsibility should be to hedge the local currency with the default one in order to increase the sales as well as as the profit margins in terms of positive values, which, as a result, would increase the concept of unrealized gain from the conversion........................

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