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Foreign Exchange Hedging Strategies at General Motors
Transcript of Foreign Exchange Hedging Strategies at General Motors
General Motors Treasurer’s Office
One of the key functions of the treasurer’s office was financial risk management, which included management of not only market risk (Foreign Exchange, interest rate and commodities exposures) but also counterparty, corporate and operational risk.
For Foreign Exchange (FX), all of GM‘s hedging activities were concentrated in two centres:
• The Domestic Finance Group in New York handled FX hedging for GM entities located in North America, Latin America, Africa and Middle East.
• The European Regional Treasury Centre (ERTC) was GM’s largest foreign exchange operation , covering European and Asia Pacific FX Exposures
Review Of Corporate Hedging Policy
General corporation hedging policy
1. Reduce cash flow and earnings volatility
2. Minimize the management time and cost dedicated to global fx management
3. Align FX Management in a manner consistent with how GM operates its automotive business
Argentinian Peso exposure
Forward contract simulation
Argentina presented GM Treasury with another set of critical decision arising from the increasing macroeconomic uncertainty Argentina facing GM’s extensive operations there.
Feldstein considered how a potential devaluation of the peso against the dollar from 1:1 to 2: 1 would impact GM Argentina
Feldstein and Oysterman needed to decide how to proceed, was it worth the cost to increase the size of GM’s hedge position beyond what was required by usual policy.
reviewed the market for forwards and options on the ARS and compiled historical prices on 1, 6, and 12 month forward rates of Peso vs dollar.
NIR SONIA PRAMESWARI
The company faces significant level of currency risk due to geographical representation in a number of countries.
50% vs 75%
The translational risks can be minimized by borrowing in local currency so that overall risk can be netted off.
GM’s Treasurer Office performed in a full range corporate treasury function from its head office in New York and through additional locations in Brussels, Singapore and Detroit.
Having local market knowledge and a trading center in both european and US time zones was also very helpful, because GM was active in each of the major foreign exchange markets.
options and forward
50% hedging size
options and forward 75% hedging size
Since GM Canada’s functional currency was USD, its exposure to Canadian dollar was recognized as a foreign currency exposure
Projected Cash flow exposure of GM Canada: -1682 C$. Net Monetary Asset/Liability exposure of GM Canada: -2143 C$.
Balance sheet and cash flow exposure