What do you think of GM’s foreign exchange hedging policies?

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CASE 1: FOREIGN EXCHANGE HEDGING AT GENERAL MOTORS.

The Treasury team at General Motors (GM) is responsible for managing the corporation’s varied financial transactions and their associated risks. With operations

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and subsidiaries all over the world, GM has exposure to numerous currencies. The company’s hedging policy defines what exposures should be hedged and how the prescribed hedges should be implemented. GM’s passive hedging strategy is intended to minimize management time and discretion spent on hedging decisions and does not usually accommodatehedgingtranslational exposures. Exceptions to the hedging policy must be approved by the Head of Treasury. The Head of Treasury is currently reviewing two proposals for the Canadian dollar and the Argentinean peso. He and his team haveto evaluate GM’s exposure to each currency, determine the risks, consider other approaches to managing these currency risks, and decide if GM should depart from its formal hedging policy. If they decide to go ahead, they would also need to consider what instruments to use to implement the hedges.

Answer the following questions relating to the case

.(i)Shouldmultinational firms hedge foreign exchange rate risk?If not, what are the consequences? If so, how should they decide which exposures to hedge? (ii)What do you think of GM’s foreign exchange hedging policies? Would you advise any changes?(iii)Should GM deviate from its policyin hedging its CAD exposure? Why or why not?(iv)If GM does deviate from its formal policy for its CAD exposure, how should GM think about whether to use forwards or options for hedging?(v)Why is GM worried about the ARS exposure? What operational decisions could it have made or now make to manage this exposure?

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