GENERAL MOTOR RISK

R I S K I N D E N T I F I C AT I O N , R I S K
MEASUREMENT, RISK MAPPING

Syndicate 6

GENERAL MOTOR RISK

A L F I A N D I I . M AWA R D I
29112491
A N A S I A P U S PA
29112477
C H R I S T I A N I N G T YA S A . P. P
29112546
F E R RY K R I S N A
29112479
H E N N Y Z A H RA N Y
29112551
INKA BAHAR
29112443

Syndicate 6

INTRODUCTION
General Motors was the worlds largest automaker
in 2001 with 15.1% market share. GM was founded
in 1908. GM had manufacturing operations in more
than 30 countries, and its vehicle were sold in
approximately 200 countries.
Eric Feldstein had three risk management decisions
to make: what to do about (i) GMs billion dollar
exposure to the Canadian dollar, (ii) GMs exposure
to the Argentinean peso in light of the expected
devaluation in the months ahead, and (iii) the
continuing strategic concern about fluctuations in
the Japanese yen, which figured so heavily into the
cost structures of some of GMs competitors.

CORPORATE HEDGING POLICY

Three Primary Objectives:
1. Reduce cash flow and earnings volatility
2. Minimize the management time & cost in FX
management
3. Align FX management that consistent with how
GM operates its automotive business

CORPORATE HEDGING POLICY (2)

Translation exposures are ignored

Functional currency: Primary operating currency
Passive hedging is preferred over active
50% forward contracts (1-6 months), and
50% options (months 7-12)
Combined hedge, the options: 25% of hedge
position
Rolling forward creates over or under hedge
Average delta hedge ratio is 37,5% (tolerance +/5%)

RISKS FROM FX MANAGEMENT

1.
.
.
2.
3.

Transactional Exposures
Debts and A/R
Affect income statement
Translational Exposures
Operational Exposures

OBJECTIVES
Risk Identification
Risk Measurement
Risk Mapping

FOREIGN CURRENCY EXPOSURE CAD

EXPOSURE
Functional currency: US Dollar (Despite large CAD
asset & liabilities)
Projected Cash Flow Exposure: 1,7 Bill CAD
Net monetary asset/liability: 2,1 Bill CAD
Propose to hedge up to 75%, as the policy didnt
allow for Translation exposure

COMPARISON
HEDGE RATIO
3.1%
Stronger

50%
3.1%
Weaker

3.1%
Stronger

75%
3.1%
Weaker

Commecial exposure
12-month rolling net receivables forecast (CAD)

Notional hedge amount at hedge ratio (CAD)

Net Cash (CAD)

-1,682

-1,682

-1,682

-1,682

-841

-841

-1,261

-1,261

FX hedge put in place (CAD)

841

Net FX exposure (CAD)

841

1,261

1,261

-841

-841

-420

-420

-2,143

-2,143

-2,143

-2,143

-43.4

40.8

-43.4

40.8

17

-16

25.6

24

GM Worldwide US GAPP FX exposure

GM Worldwide US GAPP FX exposure (CAD)

Earnings Impact on GM Worldwide

GM Worldwide FX gain/loss
FX gain/loss on hedges

USING FORWARD & OPTIONS TO

HEDGE
Cash Flow
2000000
1500000
1000000
500000

Exposure
Exp + Option
Exp + Forward

0
-500000
-1000000
-1500000
-2000000
Exchange
Rates

FORWARD OR OPTIONS?
Options: higher payoff when the CAD depreciates,
higher loss when the CAD apreciates.
Considering the volatility and the premium cost,
forward contracts are more desirable.
But, option contracts, in this case, are a more
flexible choice that cost GM only the premiums,
but can be easily traded in the market
Forward contracts, on the other hand, are a fixed
obligation locked in with a large notional amount.

ARGENTINEAN PESO
D E VA L U AT I O N R I S K

HEDGE IN 1- 6 MONTHS

HEDGE IN 6-12 MONTHS

HEDGE IN AFTER 12 MONTHS

COMPETITIVE
EXPOSURES
JPY CURRENCY RISK

COMPETITIVE EXPOSURES (1)

1

JPY content per vehicle

30%

JPY devaluation

20%

Cost savings passed on to costumer

30%

Vehicle price reduction (1*2*3)

Vehicle price reduction

Sales elasticity

Japanese Annual Sales in US (units) 4100000

Increase in Japanese Sales (units)

(4*5*6)

1.80%

1.80%
2

147600

COMPETITIVE EXPOSURES (2)

7
8
9

Increase in Japanese Sales

(units)
JPY sales cross elasticity to GM
Loss in GM sales (7*8)

Loss in GM sales (7*8)

147600
33%
49200

49200

10

GM unit contribution margin

11

GM pre-tax loss (millions) (9*10) $

12
13

Discount rate
Present value of loss (millions)

$ 5,966.67
293.56

20%
$1,467.80

YEN EXPOSURE
AFFILIATE EXPOSURE

GM
AFFILIAT AFFILIATE
SHAR
E
EXPOSURE
E

FUJI

GM Affiliate
Exposure

-1.5

20%

-0.30

ISUZU

-1.02

49%

-0.50

SUZUKI

-0.09

20%

-0.02

TOTAL

-0.82

TOTAL YEN EXPOSURE

($ BILLION)
Competitive
exposure

1.47

Commercial
exposure

0.90

Affiliate
investment
exposure

-0.82

JPY bonds
exposure

-0.50

TOTAL

1.05

RISKS SCORE
No

Risk Type

Probability

1 CAD RISK

Transaction

2 ARS Risk

Translation
Default &
Devaluation
Competitive
risk/currency risk

3 JPY

Impact

Score

10

40

10

30

45

RISK MAP MODEL

CAD: Significant risk thats unlikely to happen

JPY & ARS: Risks that happen from day to day

CONCLUSION
General Motor is a multinational company that closes with
global operation risks, such as transactional, translation and
economic
Hedging strategies will help GM to mitigate all risks that
appeared in global operation if GM does those strategies
correctly. Failure hedge may results a volatile cash flow and
makes losses in net income and shareholders equity
CAD transaction risk by using the 50% hedge ratio, the
currency exposure could gain higher profit but more volatile.
In contrast, by using the 75% hedge ratio, the currency
exposure possible gains lower profit but less volatile.
So that, higher hedge ratio may acquire less volatile with
more hedging cost.

CONCLUSION
Between option and forward contract, Forward
contract has beneficial gains that considered in
the volatility and the premium cost
In Argentina, to mitigate this devaluation risk, GM
could choose the shortest hedging process to
reduce the hedging cost (hedge in 6-12 month)
Base on risk mapping analysis, JPY and ARS has
low significant risk but its happen day by day. In
contrast, CAD has significant risk that seldom to
happen

RECOMMENDATION
Hedging shouldnt be interpreted as an all access
pass to risk-taking. It has to be fully responsible
GM should implement a strategy of paying its
employees and suppliers based on the real exchange
rate between Peso and Dollar, calculated by
comparing the PPPs of both countries.
It should also demand its receivables from the
Argentinean government instantly, in order to
convert them into USD before devaluation. If it is not
possible, it can enter into a forward contract with the
government at a predetermined exchange rate, in
order to partially offset its exposure.

RECOMMENDATION
Ongoing translational exposure will affect the
book value of assets and liabilities over a period
of time. They are largely affected by mediumterm volatility and should be hedged using oneyear forward contract.