CS01-GM-Hedging-CompExpo

9-205-096REV:MARCH31,2006________________________________________________________________________________________________________________ProfessorMihirA.DesaiandResearchAssociateMarkF.Veblenpreparedtheoriginalversionofthiscase,“ForeignExchangeHedgingStrategiesatGeneralMotors,”HBSCaseNo.204-024.ThisversionwaspreparedbyProfessorMihirA.DesaiandResearchAssociateMarkF.Veblen.CertainfiguresanddetailshavebeendisguisedanddonotreflecttheactualoperationsofGeneralMotorsCorp.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2005PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.MIHIRA.DESAIMARKF.VEBLENForeignExchangeHedgingStrategiesatGeneralMotors:CompetitiveExposuresInSeptember2001,EricFeldstein,treasurerandvicepresidentoffinanceforGeneralMotors,Corp.,turnedhisattentiontoalong-standingstrategicconcern:theeconomicconsequencesoffluctuationsintheJapaneseyen.TheyenfiguredheavilyinthecoststructuresofsomeofGM’scompetitors,andFeldsteinhadtoanticipatehowexchangeratemovementsmightimpactthosecompetitorsandGMitself.Feldsteinandhistreasuryteamwereresponsibleformanagingtherisksassociatedwithforeigncurrencytransactionsandmovements.1Forthemostpart,currencyrisksarisingfromGM’sworldwideoperationsweremanagedinaccordancewiththecompany’sformalhedgingpolicy.WhileGM’sverysubstantialexposuretotheyendidnotarisefromspecificforeignexchangetransactions,itnonethelesspresentedrealriskstothecompany.FeldsteinhadtounderstandthemagnitudeoftherisksarisingfromGM’syenexposure,andtodeterminehowbesttomanagethoserisks.OverviewofGeneralMotorsandItsCorporateHedgingPolicyGeneralMotors2GeneralMotorswastheworld’slargestautomakerand,since1931,theworld’ssalesleader.In2001,GMhadunitsalesof8.5millionvehiclesanda15.1%worldwidemarketshare.Foundedin1908,GMhadmanufacturingoperationsinmorethan30countries,anditsvehiclesweresoldinapproximately200countries.In2000,itgeneratedearningsof$4.4billiononsalesof$184.6billion1GM’sTreasuryoperationsanditsmanagementofcurrencyrisksarisingfromitsglobaloperationsaredescribedindetailinMihirA.DesaiandMarkF.Veblen,“ForeignExchangeHedgingStrategiesatGeneralMotors:TransactionalandTranslationalExposures,HBSNo.205-095(Boston:HarvardBusinessSchoolPublishing,2005).2StatisticsdrawnfromGeneralMotors,2001AnnualReport(Detroit:GeneralMotors,2002)andGeneralMotors,December31,200110-K(Detroit:GeneralMotors,2002).FortheexclusiveuseofR.Parry,2016.ThisdocumentisauthorizedforuseonlybyRyanParryinInternationalFinancialManagementtaughtbyPhilZhu,UniversityofSanDiegofromJanuary2016toMay2016.205-096ForeignExchangeHedgingStrategiesatGeneralMotors:CompetitiveExposures2(seeExhibit1forGM’sconsolidatedincomestatement).NorthAmericastillrepresentedthemajorityofsalestoendcustomersandthelargestconcentrationofnetproperty,plant,andequipment(seeExhibits2and3),buttheimportanceofGM’sinternationaloperationswasgrowingasapercentoftheoverallbusiness.GM’sCorporateHedgingPolicyGM’sglobaloperationsgaverisetosignificantcurrencyrisks,andtheTreasurer’sOfficemanagedthoserisks.ThekeyobjectivesofGM’sforeignexchange(FX)riskmanagementpolicyweretoreducecashflowandearningsvolatility;minimizethemanagementtimeandcostsdedicatedtoFXmanagement;andalignFXmanagementinamannerconsistentwithhowGMoperateditsautomotivebusiness.Theseobjectivesweresupportedbythecompany’sformalhedgingpolicy.GeneralMotorshedgedcashflows(transactionexposures)onlyandignoredbalancesheetexposures(translationexposures).ThecompanyfollowedapassivehedgingstrategythatlimitedmanagementtimespentonFXmanagement,aconsequenceofaninternalstudythatdeterminedthatinvestmentofresourcesinactiveFXmanagementhadnotresultedinsignificantoutperformanceofpassivebenchmarks.Thecorporatehedgingpolicyalsorequiredforeignexchangeexposurestobemanagedonaregional(ratherthanworldwide)basis,sothatfinancialmanagementwasconsistentwiththeoperationalfootprintoftheunderlyingbusiness.3ThepassivehedgingpolicyadoptedbyGMwasgenerallytohedge50%ofallsignificantforeignexchangeexposuresarisingfromthecashflowsassociatedwithongoingbusiness,suchasreceivablesandpayables.Suchcommercialexposureswereforecastonaregionalbasis,andaformulawasusedtodeterminetheriskinessoftheexposureandtheamounttohedgeonarollingtwelve-monthbasis.Thecorporatehedgingpolicyalsodefinedtheinstrumentsusedforhedgingactivities.Forwardcontractswereusedtohedgeexposurearisingwithinsixmonths,andoptionsusedtohedgeexposuresarisingwithinseventotwelvemonths.Alldeviationsfromtheseguidelineshadtobeapprovedbyseniorexecutives,andFeldsteinscrutinizedsuchrequestsclosely.Feldsteinandhisteamalsomonitoredforeignexchangeexposuresthatwerenotcoveredbyth