CS02-GM-Hedging-TransExpo

9-205-095REV:JANUARY9,2006________________________________________________________________________________________________________________ProfessorMihirA.DesaiandResearchAssociateMarkF.Veblenpreparedtheoriginalversionofthiscase,“ForeignExchangeHedgingStrategiesatGeneralMotors,”HBSCaseNo.204-024.ThisversionwaspreparedbyProfessorMihirA.Desai.andResearchAssociateMarkF.Veblen.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.CertainfiguresanddetailshavebeendisguisedanddonotreflecttheactualoperationsofGeneralMotorsCorp.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2005PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.MIHIRA.DESAIMARKF.VEBLENForeignExchangeHedgingStrategiesatGeneralMotors:TransactionalandTranslationalExposuresInSeptemberof2001,EricFeldstein,TreasurerandVicePresident,FinanceforGeneralMotorsCorporation(GM)paidlittleattentiontohisunobstructedviewofCentralParkfromhisofficefarabovetheManhattantraffic.Hewaspreoccupiedwithparticularforeigncurrencyexposuresthatrequiredsignificantriskmanagementdecisions.AnimmediateprioritywasadecisiononwhattodoaboutGM’sbilliondollarexposuretotheCanadiandollar.AnotherpressingissuewasGM’sexposuretotheArgentineanpesoinlightoftheexpecteddevaluationinthemonthsahead.1FeldsteinandhistreasuryteamwereresponsibleforallofGM’smonetarytransactionsandformanagingthemyriadrisksassociatedwiththetimingofthosetransactions.TheyhandledeverythingfrominvestingexcesscashfromvehiclesalesreceiptstohedgingcurrencyriskswhenaforeignsubsidiarylikeOpelAustriaannounceditwouldremitadividendtotheworldwideparentcompany.TheGMTreasuryprograminvestedheavilyinitspeople,rotatingthemthroughfunctionalpositionsandofficesaroundtheworld,developingtheirskillsandexperience.TheunitcontinuedtoproduceindividualswhowentontoseniorfinancepositionswithGMsubsidiariesorelsewherewithintheGMorganizationorleftforseniorrolesatothermajorU.S.companies.AsGMexpandedaroundtheworld,themagnitudeofitsexposurestoforeigncurrenciesgrew.BecauseexchangerateswingscreatedgainsandlossesthatflowedthroughGM’sreportedincomestatement,itwasessentialfromaplanningandmanagementperspectivetounderstandGM’sforeignexchangeflowsandtomanagetheearningsandcashflowvolatilitytheyimposedonGM.FeldsteinconstantlyfollowednewsonvolatilepoliticalsituationsaroundtheworldandkeptabreastofmacroeconomictrendsthatmightaffectGM’sfinances.GMseniorexecutiveshadimplementedanumberofformalpolicieswithrespecttoforeignexchangeriskmanagementandhedgingprocedures.Thesepoliciesguidedthevastmajorityoftreasuryoperations,butonoccasionsituationsarosethatrequiredspecialattentionandpossiblyadeviationfromthestatedpolicy.Feldstein,whohadtheauthoritytosignoffonpolicydeviations,1TheeconomicconsequencesofmovementsintheJapaneseyenwerealsoofsignificantconcernandarethesubjectof“ForeignExchangeHedgingStrategiesatGeneralMotors:CompetitiveExposures,”HBSCaseNo.205-096(Boston:HarvardBusinessSchoolPublishing,2005).FortheexclusiveuseofR.Parry,2016.ThisdocumentisauthorizedforuseonlybyRyanParryinInternationalFinancialManagementtaughtbyPhilZhu,UniversityofSanDiegofromJanuary2016toMay2016.205-095ForeignExchangeHedgingStrategiesatGeneralMotors:TransactionalandTranslationalExposures2wascurrentlyreviewingsuchproposalsfortheCanadiandollar(CAD)andArgentineanpeso(ARS).Inhisanalysis,FeldsteinpaidparticularattentiontothetransactionalandtranslationalconsequencesoftheCADexposure,thechoiceofinstrumentshecouldusetoimplementanydeviationsandpossibleresponsestotheworseningsituationinArgentina.OverviewofGeneralMotorsanditsTreasuryOperationsGeneralMotors2GeneralMotorswastheworld’slargestautomaker,withunitsalesof8.5millionvehiclesin2001—15.1%worldwidemarketshare—andhadbeentheworld’ssalesleadersince1931.Foundedin1908,GMhadmanufacturingoperationsinmorethan30countries,anditsvehiclesweresoldinapproximately200countries.In2000,itgeneratedearningsof$4.4billiononsalesof$184.6billion(seeExhibit1forGM’sconsolidatedincomestatement).Thelaborcostsforits365,000employeesinthatyearamountedto$19.8billion,only$8.5billionofwhichwasforU.S.-basedpersonnel.Inadditiontovehicles,othermajorproductlinesincluded(i)financialservicesforautomotive,mortgage,andbusinessfinancing,andinsuranceservicesthroughGeneralMotorsAcceptanceCorporation(GMAC),(ii)satellitetelevisionandcommercialsatelliteservicesthroughHughesElectronics,and(iii)locomotivesandheavydutytransmissionsthroughGMLocomotiveGroupandAllisonTransmissionDivision.GMtradedontheNewYorkStockExchangeandwasacomponentoftheDowJonesIndustrialAverage.WhileNorthAmericastillrepresentedthemajorityofsalestoendcustomersandthelargestconcentrationofnetproperty,plant,andequipment(seeExh