Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposure

Problem Statement

In September of 2001 General Motors (GM) was faced with a billion dollar exposure to the Canadian dollar. At the time, North America represented approximately three-quarters of GM’s total sales and this large exposure to the CAD could significantly affect GM’s financial results. GM had a passive strategy of hedging 50% of its exposure; this paper explores the impact of hedging 75% of the exposure.
Additionally, GM faced a unique problem in Argentina, which was at risk of defaulting on its international loans. A default would also cause the Argentine Peso to be devalued from 1 peso to 1 dollar to 2 pesos to 1 …show more content…

Translational exposures are the gains and losses that arise when the assets and liabilities of a multinational’s foreign subsidiary are translated back into the reporting currency for purposes of preparing financial statements.

General Motor’s Hedging Strategy

A hedging strategy is making in one investment to offset risk in another investment or business activity. In GM's situation, the company has significant operating exposures and adopted a passive strategy of hedging 50% of these exposures. GM paired accounts receivables and accounts payable for all Regional Units to determine currency exposures. Additionally, a determination of ‘riskiness” by region was also estimated. GM’s policy was all risks greater than $10 million were to be hedged by 50%.
A 12-month rolling forecast was developed with the months 1-6 hedged by forward contracts. Months 7 -12 were hedged by options. GM-Canada uses the US dollar as its functional currency with its major exposure to its Canadian suppliers and to future payments to its retirees for pensions and benefits. To determine the effect of hedging both at 50% and at 75% of its exposure, the following analysis is presented. Additionally, the company wanted to determine the