Some of the questions in this post include: How should a multinational firm manage foreign exchange exposures? What do you think of GM’s foreign exchange hedging policies? Why is CAD exposure (GM Canada) so troubling?
How should a multinational firm manage foreign exchange exposures? Examines transactional and translational exposures and alternative responses to these exposures by analyzing two specific hedging decisions by General Motors. Describes General Motors’ corporate hedging policies, its risk management structure, and how accounting rules impact hedging decisions. Although the overall corporate hedging policy provides a consistent approach to the foreign exchange risks that General Motors must manage, the company also has to consider deviations from prescribed policies. Describes two such situations: a significant exposure to the Canadian dollar with adverse accounting consequences and GM’s exposure to the Argentinean Peso when devaluation is widely anticipated. We will evaluate the risks General Motors faces in each situation and consider which hedging strategy–if any–might be appropriate.
What is transactional exposure? The sensitivity of ‘realized’ domestic currency values of the firm’s contractual cash flows denominated in foreign currencies to (unexpected) exchange rate changes. The cash flows are already known (contracted) and we are trying to figure out how forex rate changes will affect them. Also called ‘contractual’ exposure.
What is translational exposure? The sensitivity of the firm’s consolidated financial statements to (unexpected) exchange rate changes. It is also called ‘accounting’ exposure.
To analyze foreign exchange hedging decisions, the appropriate design of risk management policies, and multinational financial management.
Currency; Derivatives; Exchange rates; Financial management; Hedging; International finance; Multinational corporations; Risk management