Solution foreign exchange hedging strategies at general motors transactional and translational expos

In addition, whereas balance sheet gains and losses can be dampened by hedging, operating earnings will also fluctuate in line with the combined and offsetting effects of currency changes and inflation. For Financial exposure resulting from loan repayment or equity transactions, it was hedged on case by case basis.

foreign exchange hedging strategies at general motors: transactional and translational exposures

The argue against hedging FX was built on the PPP theory as it states that changes in price levels in two countries will offset the exchange rate. Dells currency problems are evident in the fact that it may manufacture a product in Ireland for sale in, say, Denmark and obtain payments in Danish krone.

Other elements of transaction exposure, such as foreign currency sales contracts that have been entered into but the goods have not yet been delivered and so receivables have not yet been createddo not appear on the firm's current financial statements and instead are part of the firm's operating exposure.

Minimize transaction exposure. Minimize quarter-to-quarter or year-to-year earnings fluctuations owing to exchange rate changes.

which other currency should gm really worry about

GM would save hedging costs if they managed to offset exposures in different region. Even shifting funds from one country to another is not a costless means of hedging.

foreign exchange hedging strategies at general motors competitive exposures

Argentina as its high cost owing to location concentrated in U. In practice, there are also variations of each method. The pressure to monitor and manage foreign currency risks has led many companies to develop sophisticated computer-based systems to keep track of their foreign exchange exposure and aid in managing that exposure.

As a result, the cost of goods sold may be translated at a rate different from that used to translate sales. If a devaluation is expected, the cost of using the techniques like the cost of local borrowing rises to reflect the anticipated devaluation.

What do you think of gm?s foreign exchange hedging policies? would you advise any changes?

It also assumes risk neutrality. For Financial exposure resulting from loan repayment or equity transactions, it was hedged on case by case basis. However, volatility in cash flows is the concerns not only managers, but regulators and shareholders as well. However, this argument is not realistic because investors will face size barriers to access hedging markets as they will be required to hedge huge amounts. Otherwise, potentially profitable investment opportunities may be passed up because of corporate reluctance to tap the financial markets when internally generated cash is insufficient. Dell would like to ensure that its foreign profits are not eroded by currency fluctuations. To help reduce the impact on Indonesias balance of payments, Boeing agrees to buy parts from various Indonesian companies worth Rp 55 billion. A crucial point to realize in putting these controversies in perspective is that such gains or losses are of an accounting nature—that is, no cash flows are necessarily involved. Moreover, there is always the possibility of bad timing. As can be seen, these exposures cannot always be neatly separated but instead overlap to some extent. Just before the August peso devaluation, for example, every company in Mexico was trying to delay peso payments. If a devaluation is unlikely, hedging may be a costly and inefficient way of doing business. In summary, hedging exchange risk costs money and should be scrutinized like any other purchase of insurance. As so often happens, economists tend to favor one approach to measuring foreign exchange exposure, whereas accountants favor an alternative approach. Dufey and Sirinvasulu6 argue that consumption bundles are relates to the investors personally and it should be hedged by the investor directly however any foreign exchange exposure associated with the business should be the responsibility of the management to take the proper action for hedging.
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(PDF) Foreign Exchange Hedging Strategies at General Motors