General Motors Harvard Case Solution & Analysis

1.      General Motor’s hedging for CAD exposure

Hedging strategy is defined as doing investment in one currency, which is foreign currency to off-set the risk associated with it for doing investment in another currency. In the case of General Motors, company was significantly exposed to the operational risks due to investing in different currencies as its operations were in different currencies. To offset the risks associated with this, GM adopted a passive strategy for hedging 50% on these investment exposures. General Motors balanced its accounts receivables with its liabilities under consolidation using all the regional entities currencies exposures. Furthermore, for every region the risk was also determined. For the hedging of these risks, GM was hedging on the basis that in case all risks involved was greater than $10 million then it should be hedged at 50%.

The calculations in Excel were made on the basis that all the risks must be hedged using the forward contract for first six months such as first month to six months. Later on, the remaining six months should be hedged using the option instruments such as seventh month to twelfth month. General Motors Canada used the US dollar as its base operational currency for the exposure to its suppliers in Canada and for the future payments, which would be made to its pensioners for their benefits. To find out the impact of hedging on two scenarios, one using 50% hedging and second using 75% hedging of its risk exposure. Under this General Motors determined the 3.1% effects in movements by appreciation of 3.1% and depreciating 3.1% from the exchange rates given as 1.5780.

Please refer the Excel sheet and Exhibit 1in the Appendices for the calculation of CAD/USD hedging at 50% and 75%.

2.      General Motor’s hedging for Argentina Peso

General Motor faced the challenges of increasing fluctuation of economic conditions in Argentina. This could significantly cause the operation of General Motors in Argentina.  With the fact given in the case about the current status of the Argentina Peso over US Dollar exchange rate, it was fixed at that time at ARS 1 against USD 1. From the economic conditions, it were estimated that Argentina Peso will depreciate against US Dollar with the ratio of ARS 2:1 USD. Whereas, there were no consensus made on the reasons that’s why Argentina’s economic conditions declined, but the information was that it is because of the three factors involved in the significant devaluation of Argentina’s Peso. These factors involved are as follows:

  • Foreign loan was $16.5 billion in 2002
  • Argentina’s economy losses its competitiveness
  • Losing the significant partners in commercial investments

According the information given in the case, Argentinean government borrowed a large portion of loan in terms of amount for the rest of the previous year, which was around $16.5 billion. The savings and investment balance was neglected due to this ignorance; Argentina was approaching towards the default situation with respect the repayments of these loans. The Argentina’s currency Peso was depreciating against the different currencies. This appreciation also became the reason for which the export prices declined and this affected the competitiveness of the economy in the global market. On the other hand, Argentina’s economic condition also affected the imports of the country as the import prices continued to decrease. Above all, the worse economic conditions of Argentina had the multiplier effect.

All of these factors defined earlier resulted in a devaluation of the Argentina’s Peso against US Dollar, which significantly impacted the General Motors’ operation. As a result, General Motors’ assets would be devalued, but this only impacted when General Motors wanted to liquidate its assets in Argentina for a short period of time. On the other hand, it would also benefit the General Motors as it would lead towards the lower manufacturing cost of vehicle, which improved the General Motors’ market position. From this point, this would reduce the cost of material those were available in the local market and it would also reduce the labor cost and in result reduced the operational cost. This would give the General Motors the economies of scale and GM would produce more vehicles in Argentina...................................

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