General Motors (GM) faces foreign exchange risks due to its global operations. This document discusses GM's hedging strategies and policies to manage risks from currencies like the Canadian dollar and Argentine peso. It analyzes hedging a portion of GM Canada's cash flows and balance sheet exposures using forwards or options. For the peso, rising default risks in Argentina could lead to devaluation, doubling GM Argentina's dollar-denominated debt in local currency terms and harming its income statement. GM takes steps like eliminating peso cash balances to mitigate these risks.
Chapter6 International Finance ManagementPiyush Gaur
The document contains sample questions and solutions related to international parity relationships and foreign exchange rates. It includes definitions of concepts like arbitrage and purchasing power parity. It also derives relationships such as interest rate parity, purchasing power parity, and the international Fisher effect. Sample problems are provided and solved related to covered interest arbitrage opportunities between currencies.
Chapter8 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems from a chapter about managing transaction exposure. It defines transaction exposure and differentiates it from economic exposure. It discusses and compares hedging transaction exposure using forward contracts versus money market instruments. It also compares the costs of hedging with forward contracts versus options contracts. Additional questions and problems cover topics like currency options, cross-hedging, and the effects of hedging on tax obligations.
The document discusses Zara's business model and IT systems. It identifies that Zara uses a just-in-time production and delivery model to bring new fashion items to stores twice weekly. Zara's IT systems currently use outdated technologies like DOS for point-of-sale systems. The document evaluates options to modernize Zara's IT infrastructure, including fully externalizing the project or having internal staff work with external partners. It recommends modernizing systems using a UNIX solution, as this provides the lowest annual fees over 5 years while meeting Zara's needs for improved in-store and headquarters connectivity.
The Walt Disney Company and Pixar Inc.: To Acquire or Not to AcquireEric Moon
This document discusses Pixar and Disney's potential acquisition of Pixar. It provides overviews of both companies and their capabilities. Pixar has strong animation and storytelling capabilities as well as a culture that promotes creativity and collaboration. Disney lacks these capabilities and has a more hierarchical culture. The document considers alternatives to acquisition like a strategic alliance but finds acquisition makes the most sense for Disney's growth given Pixar is a near-perfect strategic fit. However, risks include integrating the different cultures and financial risks around stock dilution from the deal. In the end, Disney's CEO believes more can be accomplished through full ownership than a joint venture.
Any ambitious enterprise that is going to achieve and sustain profitability and profit
growth, no question, would have to expand business abroad, to gain extra market and
sales, and profit in result, by employing benefit of location and large scale economies,
experience and learning sharing effects. However, as it has been self-proven to
countless firms, foreign markets are never a flat plain field without trap, instead
absolutely represent an adventure. The adventurers would face immense issues like
cross-border management coordination, unions, local consumer taste and preference
over products and services, local government regulations, majority among which stem
from the environmental divergence in different markets, legally, economically, or
culturally. Automotive industry is born for global market, due to the intrinsic pressure
for cost reduction, as the initial high cost per unit retards the market expansion to great
degree. Meanwhile, most of time, cars are consumer products whose markets are filled
with local taste and preference, and local government regulations because the industry
is never too little for local government to neglect the influence of automotive industry
over whole local economy. This paper will go through the basic thinking of
international business strategy concept, and focus on the current world largest
automaker Toyota’s strategy, in the context of the past and ongoing environments.
Wal-Mart has been able to sustain its competitive advantage and superior performance over the years through several factors:
1) Efficient distribution capabilities and low-cost partnerships with suppliers
2) Advanced data collection and analysis to improve demand forecasting
3) A customer-oriented workforce culture focused on low prices and continuous improvement
4) Maintaining everyday low prices (EDLP) to increase customer satisfaction and loyalty
To continue this success, Wal-Mart should focus on cost leadership through large scale operations and private label brands, address public relations issues, and enhance worker benefits to protect its reputation.
Chapter6 International Finance ManagementPiyush Gaur
The document contains sample questions and solutions related to international parity relationships and foreign exchange rates. It includes definitions of concepts like arbitrage and purchasing power parity. It also derives relationships such as interest rate parity, purchasing power parity, and the international Fisher effect. Sample problems are provided and solved related to covered interest arbitrage opportunities between currencies.
Chapter8 International Finance ManagementPiyush Gaur
This document provides sample answers and solutions to end-of-chapter questions and problems from a chapter about managing transaction exposure. It defines transaction exposure and differentiates it from economic exposure. It discusses and compares hedging transaction exposure using forward contracts versus money market instruments. It also compares the costs of hedging with forward contracts versus options contracts. Additional questions and problems cover topics like currency options, cross-hedging, and the effects of hedging on tax obligations.
The document discusses Zara's business model and IT systems. It identifies that Zara uses a just-in-time production and delivery model to bring new fashion items to stores twice weekly. Zara's IT systems currently use outdated technologies like DOS for point-of-sale systems. The document evaluates options to modernize Zara's IT infrastructure, including fully externalizing the project or having internal staff work with external partners. It recommends modernizing systems using a UNIX solution, as this provides the lowest annual fees over 5 years while meeting Zara's needs for improved in-store and headquarters connectivity.
The Walt Disney Company and Pixar Inc.: To Acquire or Not to AcquireEric Moon
This document discusses Pixar and Disney's potential acquisition of Pixar. It provides overviews of both companies and their capabilities. Pixar has strong animation and storytelling capabilities as well as a culture that promotes creativity and collaboration. Disney lacks these capabilities and has a more hierarchical culture. The document considers alternatives to acquisition like a strategic alliance but finds acquisition makes the most sense for Disney's growth given Pixar is a near-perfect strategic fit. However, risks include integrating the different cultures and financial risks around stock dilution from the deal. In the end, Disney's CEO believes more can be accomplished through full ownership than a joint venture.
Any ambitious enterprise that is going to achieve and sustain profitability and profit
growth, no question, would have to expand business abroad, to gain extra market and
sales, and profit in result, by employing benefit of location and large scale economies,
experience and learning sharing effects. However, as it has been self-proven to
countless firms, foreign markets are never a flat plain field without trap, instead
absolutely represent an adventure. The adventurers would face immense issues like
cross-border management coordination, unions, local consumer taste and preference
over products and services, local government regulations, majority among which stem
from the environmental divergence in different markets, legally, economically, or
culturally. Automotive industry is born for global market, due to the intrinsic pressure
for cost reduction, as the initial high cost per unit retards the market expansion to great
degree. Meanwhile, most of time, cars are consumer products whose markets are filled
with local taste and preference, and local government regulations because the industry
is never too little for local government to neglect the influence of automotive industry
over whole local economy. This paper will go through the basic thinking of
international business strategy concept, and focus on the current world largest
automaker Toyota’s strategy, in the context of the past and ongoing environments.
Wal-Mart has been able to sustain its competitive advantage and superior performance over the years through several factors:
1) Efficient distribution capabilities and low-cost partnerships with suppliers
2) Advanced data collection and analysis to improve demand forecasting
3) A customer-oriented workforce culture focused on low prices and continuous improvement
4) Maintaining everyday low prices (EDLP) to increase customer satisfaction and loyalty
To continue this success, Wal-Mart should focus on cost leadership through large scale operations and private label brands, address public relations issues, and enhance worker benefits to protect its reputation.
Harley Davidson HBR Case analysis- Preparing for the next centuryJibin Joseph
Here are potential responses to the questions:
B1/B2
Q1. Some people tattoo the Harley Davidson logo on their body because the brand has become a lifestyle and a culture. It represents freedom, rebellion and individuality for many riders. Tattooing the logo is a way for super fans to permanently identify with the brand.
Q2. Harley Davidson seems to be trying to balance going back to its roots while also moving into the future. On one hand it is preserving traditions like the V-twin engine, but it is also innovating with new designs, technologies and targeting younger riders. It remains to be seen if this dual approach will be successful long term.
C1/C2
1) The document summarizes Porter's 1996 paper "What is Strategy?" which defines strategy as creating unique activities that are valuable and difficult for rivals to imitate. It aims to differentiate strategy from operational effectiveness.
2) The paper discusses how many managers focus on operational effectiveness like benchmarking and outsourcing rather than developing a unique strategy, leading companies to be unable to sustain profits. Strategy requires choosing a unique position and making trade-offs that competitors cannot easily copy.
3) A strong leader is needed to develop and clearly communicate a strategy while maintaining discipline and focus on customers as industries change. Strategy and operational effectiveness are different and both are needed but strategy should not be replaced by a focus only on effectiveness.
FIN4140 Corporate Finance: Marriott corporation case study solutionNURHANI MUIS
The document discusses the cost of capital calculation for Marriott Corporation's three divisions: lodging, restaurants, and contract services. It first calculates the weighted average cost of capital (WACC) for Marriott as a whole as 11.87%. It then calculates the WACC for each division separately by determining the cost of equity using CAPM and cost of debt, weighted by the capital structure of each division. The WACC is 9.47% for lodging, 13.41% for contract services, and 13.16% for restaurants. Calculating WACC at the divisional level allows each division to use a cost of capital appropriate to its risk.
HubSpot is a leader in inbound marketing but seeks to accelerate growth and increase profits. It currently has 1,000 customers but high customer acquisition costs. The document proposes segmenting customers into Owners and Marketers and adjusting pricing plans. For Owners, it suggests incentivizing use of CMS and annual contracts. For Marketers, it recommends focusing on analytics, raising prices, and demonstrating inbound marketing success. New pricing forecasts increased lifetime profits per customer for both segments.
The opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed.
First, the document presents a case study on First Direct, a bank that innovated banking channels by eliminating branches and providing personal response to calls 24/7. Second, it discusses questions around why innovation in marketing channels is difficult and what gave First Direct differentiation at launch. Third, it provides context on First Direct's history and current success with over 1.16 million customers and high usage of online and mobile banking.
Completed Winter 2002 as part of the Managerial Accounting requirements for the MBA programme at McMaster University, Hamilton, Canada. http://RobinCheung.ca/
Relevant cost analysis revealed that the Challenger deal could be a lucrative
source of incremental revenues, since the 25,000 additional units could be
produced during plant slack time; however, as a discount value line, the
Challenger program does not align strategically with BBC’s best-cost provider
strategy (Porter, 1980). Further, the initial capital outlay of $787,000 for the
project exceed BBC’s available resources.
It is recommended that BBC pursue a short-term agreement with Hi-Valu or a
competing discount retailer to produce the bicycles on more favourable credit
terms, or to seek distribution of BBC’s normal product line through alternative
retail chains.
Best Buy faces competition from online retailers who can offer lower prices. While Best Buy has higher operating costs for its physical stores, it also provides a valuable in-person shopping experience. The document evaluates alternatives for Best Buy and recommends that it invest in improving its stores and online platform while focusing on customer experience rather than just price to better compete against online retailers.
- First American Bank is considering using a credit default swap to help mitigate Charles Bank International's credit risk in providing a $50 million loan to CapEx Unlimited, a telecommunications company.
- Through the CDS, CBI would make periodic fee payments to First American Bank in exchange for credit protection on the loan to CapEx. This would transfer some of the credit risk from CBI to First American Bank.
- There are various ways to calculate the appropriate spread for the CDS, including using historical default data or bond prices of comparable companies. The estimated spread would likely be between 1.3-5.5%.
AmazonFresh is a grocery delivery service owned by Amazon that is available in some US states, London, Tokyo, Berlin, Hamburg, and Munich. It offers same-day or next-day delivery of grocery items from its stores. While online grocery faced challenges after the failures of Webvan and HomeGrocer, AmazonFresh aimed to address issues like long lead times, the need for its own logistics infrastructure, and customer density through solutions like owning warehouses and delivery fleets. It focused on expanding conveniently while refining its business model and expanding carefully to a second major city.
Mobileye Case Competition Presentation All Materials PDF_WCWyatt A. Chartrand
The document is a presentation by students analyzing the company Mobileye and its strategic path towards developing fully autonomous vehicles. It provides background on Mobileye's founding in 1999 and its growth, including becoming publicly traded in 2014. The presentation conducts internal/external analyses and recommends Mobileye partner with Tesla, retain premium pricing, and introduce a lower-cost aftermarket product. It outlines short, mid, and long-term implementation plans involving diversifying their product line, partnering with Tesla on autonomous vehicle research, and bringing a driverless car to market within 10 years through this partnership.
Midland Energy Resources, Inc. Cost of CapitalKivanc Ozuolmez
The document provides information to calculate the weighted average cost of capital (WACC) for various divisions within Midland corporation. It discusses how Mortensen's estimates of Midland's cost of capital are used for various purposes. It then calculates the overall corporate WACC of 8.548% and explains why Midland's choice of equity market risk premium (EMRP) of 5% is appropriate. It also recommends calculating separate WACCs for different divisions given their varying risk profiles. Separate WACCs are computed for the Exploration & Production and Marketing & Refining divisions, and a proposed method is provided for calculating the Petrochemical division's WACC.
This document contains a SWOT analysis and PEST analysis of JetBlue Airways operations strategy prior to 2005. It discusses how JetBlue was the first airline to offer various in-flight amenities. The document also compares the economics of JetBlue's E190 and A320 fleets, noting the E190 has higher costs per seat mile but also higher revenue. It agrees with JetBlue's decision to add the E190 to complement its existing A320 fleet. Finally, it recommends JetBlue slow fleet growth across both aircraft types to maintain a balanced fleet.
This document provides a case analysis of Airborne Express, a former cargo airline and express delivery company. It includes an introduction to the company's history and operations, as well as analyses of Porter's 5 Forces, Airborne's competitive strategies, its costs relative to FedEx, pricing approaches, and recommendations for strengthening its position. The document evaluates how industry structure has changed over time and the impact on attractiveness. It also analyzes Airborne's strategy of focusing on corporate clients, lower pricing, and metropolitan areas to differentiate itself from competitors.
Chapter9 International Finance ManagementPiyush Gaur
This document provides solutions to questions and problems related to managing economic exposure from a chapter on the topic. [1] It defines economic exposure as the possibility that a firm's cash flows and market value may be affected by unexpected exchange rate changes. [2] It explains different types of exposure a firm may face, ways to measure exposure, and strategies to mitigate exposure through hedging or operational changes. [3] The solutions analyze several examples of firms facing exchange rate risk and recommend approaches to reduce their exposure like hedging with forward contracts or diversifying markets.
Thomas Green recently joined Dynamic Displays as an Account Executive and has quickly been promoted due to his success in securing a large contract. However, he has developed a poor working relationship with his superior, Frank Davis, the Marketing Director. Green challenges Davis' authority and fails to provide updates or back up his claims with data as requested. He also works individually rather than collaborating with the team. Going forward, Green needs to improve his marketing knowledge, build trust with Davis and his team through communication and collaboration, and take responsibility for his mistakes.
Global supply chain case study team8_submit v2Meghan Histand
The team selected design options and suppliers that balanced low production costs with flexibility. They split production between overseas and domestic suppliers. For forecasting, they averaged all forecasts rather than following the consensus. They set initial production slightly above forecasts and issued change orders when costs outweighed $2M adjustment fees. Investing in market research helped inform change orders. Overall, balancing costs and flexibility along with responsiveness to new data worked well.
1. Voyages Soleil, a Canadian tour operator, must decide on a hedging strategy by April 1st to deal with $60 million in payables due in October denominated in US dollars, exposing the company to foreign exchange risk.
2. The company has three alternatives: do nothing and take the exchange rate risk, hedge using forward contracts, or borrow in Canadian dollars and invest in US dollars.
3. Hedging using forward contracts at a rate of $1.59 Canadian dollars per $1 US dollar locks in the payment at $95.68 million Canadian dollars and eliminates exchange rate risk, making it the recommended alternative.
Foreign exchange risk arises when companies or individuals engage in transactions denominated in foreign currencies. There are three main types of foreign exchange risk: transaction risk, translation risk, and economic risk. Exchange rate fluctuations, market volatility, and political/economic factors affect foreign exchange risk. Companies can mitigate this risk through hedging strategies like forwards, options, and futures contracts, diversifying currency exposure, and using financial derivatives. The case study of Toyota highlights how currency movements impacted its profits and how it employs hedging to offset foreign exchange risk. Understanding and managing this risk is important for multinational companies.
Harley Davidson HBR Case analysis- Preparing for the next centuryJibin Joseph
Here are potential responses to the questions:
B1/B2
Q1. Some people tattoo the Harley Davidson logo on their body because the brand has become a lifestyle and a culture. It represents freedom, rebellion and individuality for many riders. Tattooing the logo is a way for super fans to permanently identify with the brand.
Q2. Harley Davidson seems to be trying to balance going back to its roots while also moving into the future. On one hand it is preserving traditions like the V-twin engine, but it is also innovating with new designs, technologies and targeting younger riders. It remains to be seen if this dual approach will be successful long term.
C1/C2
1) The document summarizes Porter's 1996 paper "What is Strategy?" which defines strategy as creating unique activities that are valuable and difficult for rivals to imitate. It aims to differentiate strategy from operational effectiveness.
2) The paper discusses how many managers focus on operational effectiveness like benchmarking and outsourcing rather than developing a unique strategy, leading companies to be unable to sustain profits. Strategy requires choosing a unique position and making trade-offs that competitors cannot easily copy.
3) A strong leader is needed to develop and clearly communicate a strategy while maintaining discipline and focus on customers as industries change. Strategy and operational effectiveness are different and both are needed but strategy should not be replaced by a focus only on effectiveness.
FIN4140 Corporate Finance: Marriott corporation case study solutionNURHANI MUIS
The document discusses the cost of capital calculation for Marriott Corporation's three divisions: lodging, restaurants, and contract services. It first calculates the weighted average cost of capital (WACC) for Marriott as a whole as 11.87%. It then calculates the WACC for each division separately by determining the cost of equity using CAPM and cost of debt, weighted by the capital structure of each division. The WACC is 9.47% for lodging, 13.41% for contract services, and 13.16% for restaurants. Calculating WACC at the divisional level allows each division to use a cost of capital appropriate to its risk.
HubSpot is a leader in inbound marketing but seeks to accelerate growth and increase profits. It currently has 1,000 customers but high customer acquisition costs. The document proposes segmenting customers into Owners and Marketers and adjusting pricing plans. For Owners, it suggests incentivizing use of CMS and annual contracts. For Marketers, it recommends focusing on analytics, raising prices, and demonstrating inbound marketing success. New pricing forecasts increased lifetime profits per customer for both segments.
The opportunity to explore how a company uses the Capital Asset Pricing Model (CAPM) to compute the cost of capital for each of its divisions. The use of Weighted Average Cost of Capital (WACC) formula and the mechanics of applying it are stressed.
First, the document presents a case study on First Direct, a bank that innovated banking channels by eliminating branches and providing personal response to calls 24/7. Second, it discusses questions around why innovation in marketing channels is difficult and what gave First Direct differentiation at launch. Third, it provides context on First Direct's history and current success with over 1.16 million customers and high usage of online and mobile banking.
Completed Winter 2002 as part of the Managerial Accounting requirements for the MBA programme at McMaster University, Hamilton, Canada. http://RobinCheung.ca/
Relevant cost analysis revealed that the Challenger deal could be a lucrative
source of incremental revenues, since the 25,000 additional units could be
produced during plant slack time; however, as a discount value line, the
Challenger program does not align strategically with BBC’s best-cost provider
strategy (Porter, 1980). Further, the initial capital outlay of $787,000 for the
project exceed BBC’s available resources.
It is recommended that BBC pursue a short-term agreement with Hi-Valu or a
competing discount retailer to produce the bicycles on more favourable credit
terms, or to seek distribution of BBC’s normal product line through alternative
retail chains.
Best Buy faces competition from online retailers who can offer lower prices. While Best Buy has higher operating costs for its physical stores, it also provides a valuable in-person shopping experience. The document evaluates alternatives for Best Buy and recommends that it invest in improving its stores and online platform while focusing on customer experience rather than just price to better compete against online retailers.
- First American Bank is considering using a credit default swap to help mitigate Charles Bank International's credit risk in providing a $50 million loan to CapEx Unlimited, a telecommunications company.
- Through the CDS, CBI would make periodic fee payments to First American Bank in exchange for credit protection on the loan to CapEx. This would transfer some of the credit risk from CBI to First American Bank.
- There are various ways to calculate the appropriate spread for the CDS, including using historical default data or bond prices of comparable companies. The estimated spread would likely be between 1.3-5.5%.
AmazonFresh is a grocery delivery service owned by Amazon that is available in some US states, London, Tokyo, Berlin, Hamburg, and Munich. It offers same-day or next-day delivery of grocery items from its stores. While online grocery faced challenges after the failures of Webvan and HomeGrocer, AmazonFresh aimed to address issues like long lead times, the need for its own logistics infrastructure, and customer density through solutions like owning warehouses and delivery fleets. It focused on expanding conveniently while refining its business model and expanding carefully to a second major city.
Mobileye Case Competition Presentation All Materials PDF_WCWyatt A. Chartrand
The document is a presentation by students analyzing the company Mobileye and its strategic path towards developing fully autonomous vehicles. It provides background on Mobileye's founding in 1999 and its growth, including becoming publicly traded in 2014. The presentation conducts internal/external analyses and recommends Mobileye partner with Tesla, retain premium pricing, and introduce a lower-cost aftermarket product. It outlines short, mid, and long-term implementation plans involving diversifying their product line, partnering with Tesla on autonomous vehicle research, and bringing a driverless car to market within 10 years through this partnership.
Midland Energy Resources, Inc. Cost of CapitalKivanc Ozuolmez
The document provides information to calculate the weighted average cost of capital (WACC) for various divisions within Midland corporation. It discusses how Mortensen's estimates of Midland's cost of capital are used for various purposes. It then calculates the overall corporate WACC of 8.548% and explains why Midland's choice of equity market risk premium (EMRP) of 5% is appropriate. It also recommends calculating separate WACCs for different divisions given their varying risk profiles. Separate WACCs are computed for the Exploration & Production and Marketing & Refining divisions, and a proposed method is provided for calculating the Petrochemical division's WACC.
This document contains a SWOT analysis and PEST analysis of JetBlue Airways operations strategy prior to 2005. It discusses how JetBlue was the first airline to offer various in-flight amenities. The document also compares the economics of JetBlue's E190 and A320 fleets, noting the E190 has higher costs per seat mile but also higher revenue. It agrees with JetBlue's decision to add the E190 to complement its existing A320 fleet. Finally, it recommends JetBlue slow fleet growth across both aircraft types to maintain a balanced fleet.
This document provides a case analysis of Airborne Express, a former cargo airline and express delivery company. It includes an introduction to the company's history and operations, as well as analyses of Porter's 5 Forces, Airborne's competitive strategies, its costs relative to FedEx, pricing approaches, and recommendations for strengthening its position. The document evaluates how industry structure has changed over time and the impact on attractiveness. It also analyzes Airborne's strategy of focusing on corporate clients, lower pricing, and metropolitan areas to differentiate itself from competitors.
Chapter9 International Finance ManagementPiyush Gaur
This document provides solutions to questions and problems related to managing economic exposure from a chapter on the topic. [1] It defines economic exposure as the possibility that a firm's cash flows and market value may be affected by unexpected exchange rate changes. [2] It explains different types of exposure a firm may face, ways to measure exposure, and strategies to mitigate exposure through hedging or operational changes. [3] The solutions analyze several examples of firms facing exchange rate risk and recommend approaches to reduce their exposure like hedging with forward contracts or diversifying markets.
Thomas Green recently joined Dynamic Displays as an Account Executive and has quickly been promoted due to his success in securing a large contract. However, he has developed a poor working relationship with his superior, Frank Davis, the Marketing Director. Green challenges Davis' authority and fails to provide updates or back up his claims with data as requested. He also works individually rather than collaborating with the team. Going forward, Green needs to improve his marketing knowledge, build trust with Davis and his team through communication and collaboration, and take responsibility for his mistakes.
Global supply chain case study team8_submit v2Meghan Histand
The team selected design options and suppliers that balanced low production costs with flexibility. They split production between overseas and domestic suppliers. For forecasting, they averaged all forecasts rather than following the consensus. They set initial production slightly above forecasts and issued change orders when costs outweighed $2M adjustment fees. Investing in market research helped inform change orders. Overall, balancing costs and flexibility along with responsiveness to new data worked well.
1. Voyages Soleil, a Canadian tour operator, must decide on a hedging strategy by April 1st to deal with $60 million in payables due in October denominated in US dollars, exposing the company to foreign exchange risk.
2. The company has three alternatives: do nothing and take the exchange rate risk, hedge using forward contracts, or borrow in Canadian dollars and invest in US dollars.
3. Hedging using forward contracts at a rate of $1.59 Canadian dollars per $1 US dollar locks in the payment at $95.68 million Canadian dollars and eliminates exchange rate risk, making it the recommended alternative.
Foreign exchange risk arises when companies or individuals engage in transactions denominated in foreign currencies. There are three main types of foreign exchange risk: transaction risk, translation risk, and economic risk. Exchange rate fluctuations, market volatility, and political/economic factors affect foreign exchange risk. Companies can mitigate this risk through hedging strategies like forwards, options, and futures contracts, diversifying currency exposure, and using financial derivatives. The case study of Toyota highlights how currency movements impacted its profits and how it employs hedging to offset foreign exchange risk. Understanding and managing this risk is important for multinational companies.
2005 Outlook Sectors and themes - Executive SummaryRichard Woolhouse
This document provides an outlook and investment strategy for global equities in 2005. Some of the key points include:
1) Major macro themes that may impact stocks include an expected revaluation of Asian currencies which could benefit Asian and European stocks but hurt US stocks, high corporate free cash flow could boost late-cycle spending plays, and the US consumer is expected to remain the slowest part of the US economy.
2) At the micro level, the focus is on high-quality stocks with stable free cash flow, companies engaging in "financial self-help", and large-cap stocks over small-caps.
3) Overweight sectors include luxury goods, European food producers, investment banks, oil & gas
Chapter 18:International Managerial FinanceFiaz Ahmad
The document provides an overview of key topics in international managerial finance covered in Chapter 18, including taxes, accounting practices, risk, international capital markets, and how operating in different countries can affect capital structure. It discusses templates and study guides available for the chapter. The answers to review questions cover topics like international trade agreements, joint ventures, foreign tax considerations, the Euromarkets, translating foreign subsidiary financial statements, foreign exchange rates, political risk, repatriating cash flows, and international business combinations. Case studies and problems provide examples of assessing foreign direct investments and calculating costs of capital and net present values for projects in other countries.
- The economic stimulus packages passed by major countries contain subsidies and buy-local provisions that could seriously distort competition and harm international trade.
- Within the EU, state aid to large companies, especially automakers, is a source of tension among member states who don't want their domestic firms to fall behind.
- In the US, billions in aid for domestic automakers and suppliers could negatively affect foreign firms. The 'Buy American' policy is problematic and hinders some international firms from participating in government projects.
- While the WTO regulates tariffs, it offers few options for challenging protectionist subsidies or local preference policies, and stimulus measures risk retaliation or delaying needed reforms.
The document discusses the role of finance in strategic planning and implementation. It states that the success of a strategy depends on three factors: alignment with the external environment, an accurate view of internal competencies, and careful implementation. It outlines the strategic planning process and notes that finance establishes financial goals and metrics based on benchmarks. Finance ensures the availability of capital, provides analysis for decisions, and monitors performance. Finance functions should be aligned with strategy through tools like balanced scorecards and budgets that reflect strategic initiatives.
General Motors is analyzing whether to finance a new $1 million building. Key calculations were made, including GM's cost of debt of 5.01%, cost of preferred shares of 9%, and weighted average cost of capital of 8.33%. While the gross profit margin of 3.3% was too low, the internal rate of return was calculated to be 11.98%, higher than the WACC. Therefore, the analysis supports GM borrowing $1 million for the new building as the project will provide an acceptable return.
I have recently written an article for The Treasurer magazine, published by The Association of Corporate Treasurers, on how different companies have arrived at their decision as to the most appropriate hedging policy for them to implement. In addition I also offer some thoughts on implementation issues. I hope you find this of interest.
The document discusses the objectives and characteristics of financial sector reform. The main objectives are to deepen the financial system by increasing the proportion of savings channeled through formal institutions, facilitate term and size transformation to fund different types of investments, and achieve financial efficiency. Key areas of reform include improving resource mobilization and allocation, strengthening prudential supervision, and enhancing competition. Financial deepening is measured by indicators like the ratio of M2 to GDP over time.
1. The document contains an international finance final exam with multiple choice and essay questions covering topics like foreign exchange derivatives, hedging strategies, and currency risk management.
2. The multiple choice section tests knowledge of financial derivatives, exchange rates, translation exposure, and hedging tools like forwards, futures, and options.
3. The essay questions ask students to explain strategic exposure management, compare currency hedging instruments, define a natural hedge with an example, explain interest rate swaps, why someone would write an option, and differences between translation methods.
IT Top is considering expanding its business internationally by establishing a manufacturing facility in Oman. A capital budgeting analysis of the proposed project in Oman estimates a positive NPV of RM4 million, supporting the project. However, the analysis should also consider exchange rate fluctuations by performing sensitivity analysis using strengthening and weakening Omani Rial scenarios. Expanding internationally could provide competitive advantages for IT Top but the management must carefully evaluate risks and determine appropriate financing and hedging strategies.
The Board of Directors of Air Mauritius met with financial and legal advisors to review the company's current situation and approve a restructuring plan in response to challenges from high fuel costs, hedging losses, and decreased demand due to the global economic crisis. The plan aims to make the airline more competitive and return it to profitability once demand recovers through measures like reducing costs, restructuring routes, and obtaining new funding including asset sales and a capital injection. The Board estimates total funding needs of €65 million and losses of €18 million for the first nine months of the fiscal year and €23.1 million for the full fiscal year.
The document discusses foreign currency management strategies for a company operating in the door closer industry. It outlines several hedging opportunities available, including arbitrage by netting imports and exports, managing export earnings foreign currency accounts, negotiating payment terms, developing an export strategy, using forward contracts, and plain vanilla options. The overall aim is to develop a strategy that provides flexibility amid changing currency movements while adhering to hedging guidelines and maximizing profits.
Hedging is a strategy used to protect against risks from currency fluctuations. Managers hedge currency risk by contracting to sell foreign currency in the future at the current exchange rate, locking in the rate to avoid losses from devalued currency. If managers correctly predict exchange rate movements, it boosts fund returns. There are risks to businesses and investments from changes in exchange rates. Hedging tools include forward contracts that lock in future rates and options that provide the right but not obligation to exchange currency.
The document provides an initiation of coverage on the Latam autoparts industry. It discusses key trends driving growth in the industry, such as automakers outsourcing production to emerging markets and suppliers to lower costs. It introduces five leading autoparts companies in the region and develops a proprietary investment methodology to evaluate and initiate coverage on the companies. Autometal receives a Buy rating, while Randon and Marcopolo receive Sell ratings based on valuation analysis incorporating discounted cash flow models and trading multiples. Iochpe-Maxion and Mahle Metal Leve receive Hold ratings. Important risks to the industry include a worsening competitive environment and an economic downturn in key markets like Europe.
This document provides information for a group presentation on international business. It discusses the objectives of the presentation and tutorial program. It provides topics for the group presentation on regional economic integration and the implications of a single currency in the EU. It defines key terms in foreign exchange and the implications of exchange rate movements for managers of international businesses. It includes sample questions that could be addressed and links to relevant videos.
This chapter covers finance and accounting topics within an MBA program. It discusses international financial management, including currency exchange rates, foreign direct investment, and hedging foreign exchange risk. It also discusses accounting classifications of costs and management accounting for planning, controlling operations, and decision making. The chapter aims to teach finance and accounting topics together to avoid losing their interconnectedness.
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Foreign exchange hedging strategies at general motors
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Foreign Exchange Hedging Strategies at General Motors
Sukarnen
DILARANG MENG-COPY, MENYALIN,
ATAU MENDISTRIBUSIKAN
SEBAGIAN ATAU SELURUH TULISAN
INI TANPA PERSETUJUAN TERTULIS
DARI PENULIS
Untuk pertanyaan atau komentar bisa
diposting melalui website
www.futurumcorfinan.com
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Summary
Overview of General Motors and its Treasury Operations
General Motors
General Motors was the world’s largest automaker, with unit sales of 8.5 million vehicles in 2001-15.1% worldwide market share-and
had been the world’s sales leader since 1931. Founded in 1908, GM had manufacturing operations in more than 30 countries, and its
vehicles were sold in approximately 200 countries. In 200, it generated earnings of $4.4 billion on sales of $184.6 billion. The labor
costs for its 365,000 employees in that year amounted to $19.8 billion, only $8.5 billion of which was for U.S.-based personnel. In
addition to vehicles, other major product lines included:
(i) financial services for automotive, mortgage, and business financing, and insurance services through General Motor
Acceptance Corporation (GMAC),
(ii) satellite television and commercial satellite services through Hughes Electronics, and
(iii) locomotives and heavy duty transmissions through GM Locomotive Group and Allison Transmission Division.
GM traded on the New York Stock Exchange and was a component of the Dow Jones Industrial average.
While North America still represented the majority of sales to end customers and the largest concentration of net property, plant, and
equipment, the importance of GM’s international operations was growing as a percent of the overall business. With globalized
production, these figures understated the degree to which intermediate goods in GM’s supply chain moved around the world. Its
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market share in Latin America was 20% and in Europe had reached 10% (20% and in Europe had reached 10% (20% if Fiat’s figures
were included). Increasing market share in Asia, which stood at 4%, was a major strategic objective for GM.
General Motors Treasurer’s Office
Various groups within the Treasurer’s Office were involved in the implementation of financial risk management policy. For foreign
exchange, all of GM’s hedging activities were concentrated in two centers:
The Domestic Finance group in New York handled FX hedging for GM entities located in North America, Latin America, Africa
and the Middle East.
The European Regional Treasury Center (ERTC) was GM’s largest foreign exchange operation, covering European and Asia
Pacific FX exposures.
Review of Corporate Hedging Policy
General Motor’s overall foreign exchange risk management policy was established to meet three primary objectives:
1. Reduce cash flow and earnings volatility.
2. Minimize the management time and costs dedicated to global FX management.
3. Align FX management in a manner consistent with how GM operates its automotive business.
Passive Policy: Hedge 50% of Commercial (operating) Exposures
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GM policy also outlined what sorts of derivative instruments were to be used for hedging.
Commercial (operating) exposures A determination of “riskiness” was then made on regional basis, deciding which FX
exposures were significant enough to warrant hedging. This determination was governed by the following formula:
Implied risk = Regional motional exposure x Annual volatility
of relevant currency pair
Commercial exposures (capital expenditures) Unlike uncertain cash flows, planned investments (purchases of fixed assets or
equipment) that met either of the following two tests were hedged with forward contract using a 100% hedge ratio to the anticipated
payment date:
(i) amount in excess of $1 million, or
(ii) implied risk equivalent to at least 10% of the unit net worth.
Financial exposures Other certain cash flows, including loan repayment schedules and equity injections into affiliates were hedge
on a case-by-case basis.
Translation (balance sheet) exposures Translation exposures were not included under GM’s corporate hedging policy.
Accounting treatment One of the goals of GM’s hedging policy was to reduce earnings volatility. This goal was challenging given
that, under the prevailing accounting standards (FA 133), the forwards and options GM would use generally had to be marked-to-
market and the gains and losses flowed through the income statement
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Reporting Hedging activities were closely tracked and regularly reviewed within the Treasury Group.
Understanding the Choice of a Subsidiary’s Functional Currency
When GMS instead uses its local currency (euros) as its functional currency,
1. GM’s consolidated income statement will include a gain or loss on the changes in value, as measured in GMS’s local
currency of GMS’s non-local currency denominated asset/liability (GMS’s income statement will show the same).
2. GM’s balance sheet will show an adjustment to shareholders’ equity for the translation to U.S. dollars of GMS’s
assets/liabilities.
Implementing a Foreign Exchange Hedge
When a hedge position was being created or modified, Mercedes Michel handled transactions in both forward and options contracts.
Comparing Forward Contracts with Options
Specifically, it compared:
(1) the combination of the outright exposure plus a 50% hedge using forward contracts, with
(2) the combination of the outright exposure plus a 50% hedge using options.
Special Situations—the Argentinean Peso
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Credit analysts at Standard & Poor’s and Moody’s had downgraded Argentina to six and seven grades below investment grade,
respectively. GM Treasury’s Latin America experts believed the short-term probability of default had reached 40%. In the medium
term, the probability rose to 50% because Argentina had not addressed key issues such as trade liberalization, state reform, and
pension and healthcare reform.
Hedging the Peso Exposure
GM Argentina had already eliminated peso cash balances and transferred them in USD to the European Regional Treasury Center. It
was also considering the purchase of some materials locally in ARS for export to other entities on the region that would pay for them
in hard currency. GM-Argentina’s USD borrowings would certainly have to be addressed.
Understanding Competitive Exposures
Source of Competitive Exposure
This exposures was not created by GM’s inflows or outflows or how it chose to run its business. Rather, it was a result of competing
against companies with different home currencies. As a result, any depreciations in the yen lowered their relative cost structure as
compared to the U.S. and European auto manufacturers.
Measuring Competitive Exposures
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There was no projected receivable or payable and no capital investment or loan to be repaid, yet there was still a bottom-line impact
that stemmed from fluctuations in exchange rates.
The two most difficult factors to estimate were the consumer sales elasticity and the cross elasticity to GM sales.
A Place for Competitive Exposures in GM’s Corporate Hedging Policy?
Unlike the CAD and ARS deviations, the yen exposures was simply more difficult to measure. In the context of a passive policy,
implementing too many deviations might create a de facto active policy. What about the German car makers? Should euro exposures
be measured too? Either way, the first step was getting a handle on the magnitude of the yen exposure.
Conclusion
Feldstein had a great deal of thinking to do. None of the three cases—the CAD deviation, the ARS deviation, or the JPY deviation—
was a simple one. He was being asked to sign off on some very significant exposures, some in ways not necessarily contemplated
by GM’s hedging policy. It was important for him to understand not just what the policy permitted, but hwhat the economics of each
exposure were, and what was the best for GM as a consolidated global entity in each case.
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DISCUSSION
1. The Canadian Dollar
There are two assignments from Eric Feldsten, Treasurer and Vice President, Finance for GM Corp. regarding GM Canada’s
exposure to Canadian Dollar:
1. Feldsten needed a comparison of the income statement impact of a 75% versus a 50% hedge ratio. The proposal suggested
that the expected volatility of the CAD/USD exchange rate was plus-or-minus 3.1% around the 1.5780 exchange rate on the
date of the memo. Using this volatililty, Ostermann, FX and Commodities Manager, could do a sensitivity calculation with a
favourable scenario (gain due to FX movements) and an unfavourable scenario (loss due to FX movements) based on the
after-tax gain/loss impact from the projected CAD cash flow as well as from the CAD net monetary liability. Dividing this
amount by the 550 million shares GM had outstanding, Ostermann could determine how much the proposed deviation would
reduce EPS volatility. To simplify the calculation, Ostermann ignored the costs of hedging (such as option premiums).
2. Comparing forward contracts with options
Specifically, it compared : (1) the combination of the outright exposure plus a 50% hedge using forward contract, with (2) the
combination of the outright exposure plus a 50% hedge using options.
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First Analysis
GM Canada projected Cash Flow Exposure
Amount Sept. 30, 2001
(C$)
12 month C$ cash flow forecast - short 1,682.00
C$ Monetary net liability position - short 2,143.00
Total 3,825.00
Strategy I : 50% hedge ratio
3.1% drop Base case 3.1% up
Exchange rate CAD/USD 1.531 1.578 1.627
12 month C$ cash flow forecast - short 1,682.00
Hedged portion: 50% over 12 month C$ cash flow
forecast 841.00 532.95 532.95 532.95
Unhedged portion: 50% over 12 month C$ cash flow
forecast 841.00 549.47 532.95 516.93
Sub-total 1,082.43 1,065.91 1,049.88
Difference from existing exposure -
hedged/unhedged strategy (50% hedged) - negative
indicating unfavourable to GM 1,065.91 (16.52) - 16.02
C$ Monetary net liability position - short 2,143.00
Not hedged 1,400.15 1,358.05 1,317.21
Difference because of FX movements - negative
indicating unfavourable to GM 1,358.05 (42.10) - 40.83
TOTAL (58.62) - 56.86 (1.76)
Probability (19.54) - 18.95 (0.59)
Shares outstanding 550
Unfavourable EPS impact (0.00107)
Strategy II : 75% hedge ratio on commercial
exposure (approximately 30% hedging ratio for
the balance sheet exposure)
12 month C$ cash flow forecast - short 1,682.00
Hedged portion: 75% over 12 month C$ cash flow
forecast 1,261.50 799.43 799.43 799.43
Unhedged portion: 25% over 12 month C$ cash flow
forecast 420.50 274.74 266.48 258.46
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TOTAL (58.62) - 56.86 (1.76)
Probability (19.54) - 18.95 (0.59)
Shares outstanding 550
Unfavourable EPS impact (0.00107)
Strategy II : 75% hedge ratio on commercial
exposure (approximately 30% hedging ratio for
the balance sheet exposure)
12 month C$ cash flow forecast - short 1,682.00
Hedged portion: 75% over 12 month C$ cash flow
forecast 1,261.50 799.43 799.43 799.43
Unhedged portion: 25% over 12 month C$ cash flow
forecast 420.50 274.74 266.48 258.46
Sub-total 1,074.17 1,065.91 1,057.89
Difference from existing exposure -
hedged/unhedged strategy (75% hedged) - negative
indicating unfavourable to GM 1,065.91 (8.26) - 8.01
C$ Monetary net liability position - short 2,143.00
Hedged portion: 30% 642.90 407.41 407.41 407.41
Unhedged portion: 70% 1,500.10 980.10 950.63 922.05
Sub-total 1,387.52 1,358.05 1,329.46
Difference from existing exposure -
hedged/unhedged strategy (30% hedged) - negative
indicating unfavourable to GM 1,358.05 (29.47) - 28.58
TOTAL (37.73) - 36.60
Probability (12.58) - 12.20 (0.38)
Shares outstanding 550
Unfavourable EPS impact (0.00069)
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2. Special Situations – the Argentinean Peso
Background of issue:
Argentina government, in order to cure rampant inflation, has exercised control over foreign currency exchange and maintained a
peg to the U.S. Dollar at USD 1 : ARS 1. With a debt-to-GDP ratio of 45% and $16.5 billion coming due in 2002, the ”zero-deficit” law
passed by the Senate in 2001 put Argentina at serious risk of defaulting on its debt. A default would undoubtedly be accompanied by
a massive devaluation. The GM treasury analysts expected a potential devaluation of the peso against the dollar from 1:1 to 2:1.
Issue :
1. Local currency equivalent of USD borrowings by GM Argentina (a local currency functional subsidiary) would grow, putting
financial pressure on the subsidiary. In fact, the $300 million USD net liability position would double in peso terms to an ARS
600 million liability. There would be a consequent ARS 300 million adverse income statement impact, as reflected in the loss
on foreign exchange, for the subsidiary.
2. there would be a substantial translation loss on GM Argentina’s ARS denominated net assets when these net assets were
consolidated in USD with all other assets of GM Worldwide.
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GM Argentina Balance Sheet, Monetary Assets and Liabilities by Currency
A: 30 September 2001
ARS Monetary Assets ARS Monetary Liabilities
Scrap incentive owned by government 45.80 Payables to local suppliers 24.10
Interest subsidy owned by government 3.20 Provisions to local suppliers 11.30
VAT credit and other tax owed by government 130.60 ARS loan (VAT financing) 13.70
Receivable (tax credit reimbursement) 2.70 Other provisions 9.80
Other 7.80 Tax payable 2.00
Total ARS Monetary Assets 190.10 Total ARS Monetary Liabilities 60.90
USD Monetary Assets USD Monetary Liabilities
Cash 2.50 Accounts payable 224.50
Receivables 20.50 Loans 101.30
Total USD Monetary Assets 23.00 Total USD Monetary Liabilities 325.80
Total Monetary Assets 213.10 Total Monetary Liabilities 386.70
ARS net property, plant and equipment
(assumption) 350.00 Stockholders' Equity 176.40
Common stock at 1:1 100.00
Retained earnings 76.40
Total Assets 563.10 Total Liabilities and Equity 563.10
First Problem faced by GM Argentina :
Net USD Monetary Liabilities (325.80 - 23.00) 302.80
With likely devaluation of Peso to 2:1
Estimated loss on foreign exchange flowed
through Statement of Income 302.80
Implication : Stockholders' Equity
will become negative (126.40)
Second Problem faced by GM Worldwide when
consolidating GM Argentina
Assuming using September 30, 2001 figures
ARS Monetary Assets ARS Monetary Liabilities
Scrap incentive owned by government 45.80 Payables to local suppliers 24.10
Interest subsidy owned by government 3.20 Provisions to local suppliers 11.30
VAT credit and other tax owed by government 130.60 ARS loan (VAT financing) 13.70
Receivable (tax credit reimbursement) 2.70 Other provisions 9.80
Other 7.80 Tax payable 2.00
GM Argentina Balance Sheet (ARS currency)
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With likely devaluation of Peso to 2:1
Estimated loss on foreign exchange flowed
through Statement of Income 302.80
Implication : Stockholders' Equity
will become negative (126.40)
Second Problem faced by GM Worldwide when
consolidating GM Argentina
Assuming using September 30, 2001 figures
ARS Monetary Assets ARS Monetary Liabilities
Scrap incentive owned by government 45.80 Payables to local suppliers 24.10
Interest subsidy owned by government 3.20 Provisions to local suppliers 11.30
VAT credit and other tax owed by government 130.60 ARS loan (VAT financing) 13.70
Receivable (tax credit reimbursement) 2.70 Other provisions 9.80
Other 7.80 Tax payable 2.00
Total ARS Monetary Assets 190.10 Total ARS Monetary Liabilities 60.90
USD Monetary Assets translated to ARS using 2:1
USD Monetary Liabilities
translated to ARS using 2:1
Cash 5.00 Accounts payable 449.00
Receivables 41.00 Loans 202.60
Total USD Monetary Assets 46.00 Total USD Monetary Liabilities 651.60
Total Monetary Assets 236.10 Total Monetary Liabilities 712.50
ARS net property, plant and equipment
(assumption) 350.00 Stockholders' Equity (126.40)
Total Assets 586.10 Total Liabilities and Equity 586.10
Total Liabilities in USD Dollar
(divided by 2) 356.25
Common stock (assumption) 100.00
Retained earnings 76.40
Translation loss adjustment (239.60)
Total Stockholders' Equity (63.20)
Total Assets in USD Dollar (ARS balance/2) 293.05 Total Assets and Liabilities 293.05
Translated GM Argentina Balance Sheet
GM Argentina Balance Sheet (ARS currency)
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From the above translated GM Argentina Balance Sheet in USD Dollar using Current Method, it is obvious that the stockholder’s
equity of GM Argentina will suffer negative worth after the devaluation of ARS towards US Dollar from 1:1 to 2:1. Before devaluation,
the equity indicates positive ARS176.4 and after devaluation, it reduces to negative ARS126.40. From the GM Worldwide
consolidation level, there would be a negative impact to EPS after taking into effect of translation adjustment loss totaling
US$239.60.
Management of an USD Accounts Payable -
assuming falling due within 90 days
Hedging strategy:
1 Remain unhedged
2 Forward market hedge
3 Money Market Hedge
US$224.50/(1 + (0.05 x 90/360)) USD
Principal 224.50
USD investment rate per year 5%
USD needed today 221.73
ARS needed at the current spot rate ARS1/US$1 221.73
ARS 221.73 x [1 + (0.12 x 90/360)]
GM Worldwide WACC 12%
Total cost of the money market hedge in ARS 228.38
To implement a money market hedge, GM Argentina would exchange ARS spot and invest them for 90 days in a US Dollar
interest-bearing account. The principal and interest in US Dollar at the end of 90-day period would be used to pay the ARS
accounts payable
In order to ensure that the principal and interest exactly equal the US$224.50 due in 90 days, GM Argentina would discount
the US$224.50 by the US$ investment interest rate of 5% (assumption) for 90 days in order to determine the US$ needed
today:
Finally, in order to compare the money market hedge outcome with the other hedging alternatives, the ARS 221.73 cost today
must be carried forward 90 days to the same future date as the other hedge choices. If the current dollar cost is carried
forward at GM Worldwide WACC of 12% (assumption), the total cost of the money market hedge is
This cost is lower than the forward hedge and therefore attactive
GM Argentina could wait 90 days, exchange dollars for ARS at that time and make its payment. The amount to be paid is
uncertain and the spot exchange rate in 90 days could be very different from that expected. Assuming unbiased expectation
prevails, the forward rate for 6-month is used to reflect expected spot rate for 90 days = ARS 1.350 to US$1, this strategy will
cost ARS 303.075.
GM Argentina could buy US$ 224.50 forward, locking in a rate of ARS 1.45 to US$ 1, and total ARS cost of ARS 325.525. This
amount is ARS 22.45 higher than the expected cost of remaining unhedged and therefore clearly preferable to the first
alternative. It was mentioned that this strategy will cost US$18.2mio for three-month forward, or resulting in total cost of ARS
343.725
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ARS 221.73 x [1 + (0.12 x 90/360)]
GM Worldwide WACC 12%
Total cost of the money market hedge in ARS 228.38
4 Option hedge
US$ 224.50 x 0.015 x ARS1.40/USD 4.71
Strike price ARS to USD 1.40
Premium rate 1.50%
4.855935
Exercise call option (US$ 224.50 x ARS 1.40/US$)
Strike price for call option 1.40 ARS 314.30
Call option premium (carried forward 90 days) 4.86
Total maximum expense of call option hedge 319.16
GM Argentina could cover its US$224.50 accounts payable by purchasing a call option on US$224.50. Assuming, a 90-day
(December 2001) call option on US Dollar with a near at-the-money strike price of ARS1.40/USD would cost 1.5% (premium),
or :
This premium, regardless of whether the call option is exercised, will be paid up front. Its value carried forward 90 days at the
WACC of 12%, would raise its end-of-period cost to ARS 4.86.
If the spot rate in 90 days is less than ARS 1.40/US$, the option would be allowed to expire and the US$224.50 for the
payable purchased on the spot rate. The total cost of the call option hedge if the option is not exercised is theoritically smaller
than any other alternative (with the exception of remaining unhedged, because the option premium is still paid and lost.
If the spot rate in 90 days exceeds ARS 1.40/US$, the call option would be exercised. The total cost of the call option hedge if
exercised is as follows:
Finally, in order to compare the money market hedge outcome with the other hedging alternatives, the ARS 221.73 cost today
must be carried forward 90 days to the same future date as the other hedge choices. If the current dollar cost is carried
forward at GM Worldwide WACC of 12% (assumption), the total cost of the money market hedge is
This cost is lower than the forward hedge and therefore attactive
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The four hedging methods of managing a US$224.50 accounts payable for GM Argentina are summarized in below Exhibit. The
costs of the forward hedge and money market hedge are certain. The cost of using the call option hedge is calculated as a
maximum, and the cost of remaining unhedged is highly uncertain.
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For US Dollar-denominated loans totaling US$101.30, the Company could consider a number of strategies, assuming the loans
payable to GM North America as a parent:
1. Replace US$-denominated loans to local currency ARS loans. This strategy could be actioned by:
having GM Argentina to obtain the same amount of ARS224.50 from local Argentine banks. However, perhaps it won’t be
easy to get local Argentina banks to finance the refinancing from US$ to ARS, and if there is, the interest rate charged will
be too high to accept.
having GM Argentina or through GM North America to use currency swaps.
Using parallel loans to hedge exchange rate risk. However, considering timeline, perhaps, this is not a good option, as it
will take time to find a good Argentina company or party that is willing to provide simultaneous loans with an agreement to
repay at a specified point in the future.
Having GM North America to be willing to convert the US$-denominated loans to be payable in ARS-based loans using
current spot rate of 1:1.
2. Other strategy to explore is to have intracompany leads and lags which is more feasible in this case.
3. Balance sheet hedge approach by creating US$-denominated receivable, for example, by having GM Argentina to do exports
to other GM affiliates, which could bring in revenues and creating receivables in US Dollar that will match the US$-
denominated accounts payable and loans.
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Translation exposure
Translation exposure for example, as faced by GM Argentina, is typically mitigated by using balance sheet hedge. A balance sheet
hedge requires an equal amount of exposed foreign currency assets and liabilities on GM’s consolidated balance sheet. This balance
sheet hedge is justified since :
1. GM Argentina is using the local currency as the functional currency.
2. GM Argentina is operating in a hyperinflationary environment
In practice, some MNCs have attempted to hedge translation exposure in the forward market. Such action amounts to speculating in
the forward market in the hope that a cash profit will be realized to offset the non-cash loss from translation. Success of this strategy
depends on a precise prediction of future exchange rates, for such a hedge will not work over a range of possible future future spot
rates. In addition, such a hedge will increase the tax burden, since the profit from the forward “hedge” (i.e., speculation) is taxable,
but the translation loss does not reduce taxable income. Also, it is still highly controversial for a firm to expend resources and acquire
hedging position with forwards and swaps to hedge accounting results.
Assuming that balance sheet hedge is acceptable to GM management, GM management could either :
1. increase exposed ARS assets without simultaneously increasing ARS liabilities, or
2. reduce ARS liabilities without simultaneously reducing ARS assets.
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ARS Monetary Assets ARS Monetary Liabilities
Scrap incentive owned by government 45.80 Payables to local suppliers 24.10
Interest subsidy owned by government 3.20 Provisions to local suppliers 11.30
VAT credit and other tax owed by government 130.60 ARS loan (VAT financing) 13.70
Receivable (tax credit reimbursement) 2.70 Other provisions 9.80
Other 7.80 Tax payable 2.00
Total ARS Monetary Assets 190.10 Total ARS Monetary Liabilities 60.90
USD Monetary Assets translated to ARS using 2:1
USD Monetary Liabilities
translated to ARS using 2:1
Cash 5.00 Accounts payable 449.00
Receivables 41.00 Loans 202.60
Total USD Monetary Assets 46.00 Total USD Monetary Liabilities 651.60
Total Monetary Assets 236.10 Total Monetary Liabilities 712.50
ARS net property, plant and equipment
(assumption) 350.00 Stockholders' Equity (126.40)
Total Assets 586.10 Total Liabilities and Equity 586.10
Net exposed liabilities in ARS 126.40
Divided by exchange rate, ARS/USD 1.00
Net exposed liabilities in USD 126.40
times amount of devaluation 200%
Expected translation loss under Current Method 252.80
GM Argentina Balance Sheet (ARS currency)
Conclusion : the final hedging choice by GM management will depend on the confidence of ARS exchange rate expectations, and
GM management’s willingness to bear risk. The money market hedge, if feasible in Argentina market, appears the preferred
alternative. Otherwise, option hedge will be the second choice.
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3. COMPETITIVE EXPOSURE FROM JAPANESE AUTOMAKERS RESULTING FROM DEPRECIATION OF JAPANESE
YEN
Summary of Data Collected
A 5% price increase could be expected to lower unit sales by around 10%
A consequent annual impact on GM's Income Statement could then be valued as a perpetuity at a 20% discount rate
Average Japanese car had between 20% and 40% Japanese content
A reasonable etimate of what the Japanese automakers might give away in terms of added incentives or lower sticker prices would be between 15% and 45% of the cost savings
Any market share losses to Japanese automakers would be shared equally among and entirely by the Big Three in Detroit.
A rough calculation around a 20% yen devaluation would capture an upper bound of the likely exposure.
Japanese automakers derived 56% and 43% of their revenues from the U.S Market in 1999 and 2000, respectively
In recent year, they sold 4.1 millions units in the United States
Equity analysts had estimated that the yen appreciation from 117 to 107 during the first half of 2000 had reduced Japanese automakers's combined global operating profits by $4 billion. Or reverse, for
every 1 yen depreciaton against the dollar, Japanese competitors' collective operating profit grew by more than US$400 million
Rough estimate from research reports suggested that the Japanese firms were unprofitable when the yen was stronger than110 to the dollar and profitable at 120 or more yen to the dollar
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Analysis
Chain of events Data Collected Assumption Base Case Case 1 Case 2
Assumption
for Base Case
Pass through
rate =30%
Pass-through
rate
Pass-through
rate
15% 45%
(1) A depreciation in the yen lead to 100 Exchange rate (Yen/USD) 100 100 100
(2) additional gross margin for Japanese
automakers, who
For every 1 yen depreciation, Japanese
competitors' collective profit grew by more
US$400 million 400
1 Yen depreciation, cost
savings (in million dollar) in
terms of operating profit 400 400 400
(3) passed along some of this benefit to
consumers in the form of lower prices, and
Average Japanese content 20-40% and pass-
through rate 15%-45% of the cost savings. 30%
pass-through rate on cost
savings : (in million US$) 120 60 180
(4) as a result of lower prices, the Japanese
automakers gained market share in the U.S.,
which
Cross elasticity to GM sales : a 5% price increase
to lower unit sales by around 10%. Japanese
automakers derived 56% and 43% of their
revenues from the U.S. market in 1999 and 2000.
Average incentive per unit in the US : Honda 664,
Toyota 725 50%
Cost saving impact of
Japanese automakers to
gaining bigger market
share in US market - in
million US Dollar 60 30 90
(5) ate into unit sales at GM, which
any market share losses to Japanese automakers
be shared equally by the Big Three 3 Shared equally by three 20 10 30
(6) lowered GM's profits, which
Average net income to net sales of GM for the
past three years 2.6% (see Exhibit 1 in the Case) 2.60%
Impact to net income (on
average 2.6% to net sales) 0.52 0.26 0.78
(7) reduced GM's market value
Discount rate on income statement negative
impact = 20% at perpetuity 20%
Impact to GM's market
value 2.6 1.3 3.9
From the above analysis, it appears that for every 1 Yen depreciation against the US dollar, GM will suffer the decline in its market
value ranging from US$1.3 billion to US$3.9 billion.
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As noted in the Case Study that GM should place its estimated competitive exposure in the context of GM’s overall yen exposure.
This included :
1. a commercial exposure based on forecasted receivables and payables of US$900 million
2. an investment exposure resulting from equity stakes in several Japanese companies
Affiliate
Affiliate
Exposure
Long/(Short)
($ billions)
GM Ownership Stake
Fuji (1.50) 20%
Isuzu (1.02) 49%
Suzuki (0.09) 20%
3. a financing exposure through a yen-denominated loan, totaling US$500 million of outstanding bond.
In addition to the GM management’s efforts to lobby US Government to have a G to G discussion with the Japanese government in
order to achieve a competitive exchange rate between Japanese Yen and US Dollar, GM management could consider diversifying its
operations (and financing as well) in near future internationally, which will preposition GM management both to recognize
disequilibrium when it occurs and to react competitively. Although the disequilibrium may have been unpredictable, GM management
can often recognize its symptoms as soon as they occur.
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Recognizing a temporary change in worldwide competitive conditions permits GM management to make changes in operating
strategies. Management might make marginal shifts in sourcing raw materials, components, or finished products. If spare capacity
exists, production runs can be lengthened in one country and reduced in another. The marketing effort can be strengthened in export
markets where the firm’s products have become more price-competitive because of the disequilibrium condition.
Even if management does not actively distort normal operations when exchange rates change, the firm should experience some
beneficial portfolio effects. The variability of its cash flows is probably reduced by international diversification of its producitons,
sourching, and sales (and financing) beause exchange rate changes under disequilibrium conditions are likely to increase the firm’s
competitiveness in some markets while reducing it in others.
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