GM would need to control the production and supply of its cars and enhance its operations in case the devaluation of the yen gives it Japanese competitors higher market share, and such movements would need to be taken into consideration to forecast the demand for GMs cars.
The current GM policy does not know how to deal with the competitive exposure. In other words, if the Canadian dollar strengthens versus the U. DaimlerChrysler's sales dropped 1.
Recall that if this investor had the view that the Canadian dollar would appreciate, he or she would either refrain from hedging the exchange risk or " double up " on the Canadian dollar exposure by buying or " going long " FXC shares.
These decisions cannot be taken just for hedging purposes. But they introduce an added risk — that of exchange rates. How would estimate a value exposure for GM from the case information about competitive interactions with Japanese firms? The above calculations have not taken into account any growth of the market or other variables.
Therefore, since the rate is so volatile, GM must ensure their hedging strategy adequately prepares for dramatic directional shifting in the future. The investor who had a hedge in place would have offset part of this loss through a gain in the short FXC position.
How would you recommend GM manage its operating or competitive exposures? Why is this Yen Exposure Important? Note that making investments on margin amounts to using leverageand investors should ensure that they are familiar with the risks involved in using leveraged investment strategies.
Further, I suggest an alternate, less information-intensive means for calculating a similar figure, which includes regression of GM returns to market returns, then finding an exposure coefficient to JPY-USD fluctuations; this helps to show how returns of the firm are correlated specifically to their yen exposure.
Especially when you might not have as much company specific information We could calculate GM economic exposure, which is change in firms value as exchange rate fluctuates.
Rising oil prices could lead to higher currency levels for countries that are net exporters of oil or have significant reserves, such as Canada. These instruments replicate the movements of the currency in the exchange market by either holding currency cash deposits in the currency being tracked or using futures contracts on the underlying currency.
A larges part of their costs of manufacturing consists of Yen and any fluctuations in Yen vs. We assign the same rating to equivalent hedged and unhedged funds. Hence, there are often huge fluctuations in XRs, which have severe implications for GM and the Japanese automakers, who have operating profits highly tied to small fluctuations.
Due to competition, Japanese carmakers would also need to price their vehicles similarly.Foreign Exchange Hedging Strategies at General Motors As GM expanded worldwide, the magnitude of its exposures to foreign exchange grew.
Exchange rate swings directly flows into GM s income statement which associates GM to transactional exposure in forex. GM had manufacturing operations in more than 30 countries. and (iii) the continuing strategic concern about fluctuations in the Japanese yen. which figured so heavily into the cost structures of some of GM’s competitors.1% market share.
and its vehicle were sold in approximately countries. FE Hedging Strategies at GM Should MNCs hedge foreign exchange rate risk? Multinational firms hedge foreign exchange risk in order to ensure operational and financial functionality. A MNC should hedge foreign exchange risk so it can prevent cash flow effects of the foreign firm and the decline in value of the equity holder because of the movements in exchange rates.
Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures 1. General Motors is worried about the level of the yen because: The primary concern for General. Considering the correlation analysis, when it comes to hedging decision, it is the volatility of Japanese yen that caused most concerns due to the fact that the cost structure of GM’s major competitors such as Toyota and Honda are primarily denominated in yen.
Macs hedge foreign exchange rate risk? Multinational firms hedge foreign exchange risk In order to ensure operational and financial functionality. A NC should hedge foreign exchange risk so It can prevent cash flow effects of the foreign firm and the decline in value of the equity holder because of the movements in exchange rates.
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