Hedging at General Motors
Being one of the largest automakers in the world, General Motors (GM) undertakes its manufacturing operations in over 30 countries with vehicles being sold in over 200 countries. Through undertaking its international operations it also subjects itself to various types of foreign exchange exposures due to fluctuations in the values of currencies; to manage this problem it has adopted a passive hedging policy and aims to reduce the impact of foreign exchange exposures on the business.
The first part of this report outlines the various types of foreign exchange exposures that GM can subject itself to and also outlines what methods can be used to reduce the risk associated with changes in the value of currencies; the …show more content…
General Motors has three primary objectives to be achieved through the use of hedging to manage the risk associated with foreign exchange exposure:
• Reduction of cash flow and earnings volatility – this objective is associated with a conscious decision to hedge only transaction exposures (cash flows) and ignore translation exposures (balance sheet).
• Minimize costs and time dedicated to foreign exchange management – this objective was initiated as a result of inefficient employment of resources allocated to foreign exchange management as there was a lack of out performance in the passive benchmarks.
• Aligning foreign exchange management in a consistent manner with the operation of GM’s automotive business – the final objective was associated with the view that foreign exchange exposures should be managed on a regional basis as regional management would be more consistent due to greater local understanding.
Because of these objectives the active policy was changed to a passive policy to ensure these objectives were achievable.
Designing the Hedging Policy
GM’s hedging policy is designed by the risk management committee, which meet quarterly to review and set the treasury policy for General Motors and