Financial statement

3. Evaluate GM’s currency hedging policies. [3 pages] {Gavin} {Ryan} The issue here may lie with the 50% to 75% hedge as it is doubtful as to why GM does not hedge its receivables / payables by 100%. Perhaps the issue is related to high costs of using options and their receivables / payables run into huge amounts. Additionally, GM is not keen on committing to a forward because they have positive expectations about the future exchange rate and the forward would only serve to limit their possible gains.

Inherency: Does the plan exist in the status quo (the way  things are now), and what structural or attitudinal barriers
exist?

Solvency: Does the affirmative plan solve the problem? Topicality: Does the affirmative plan meet the terms of the resolution? Is it an example of the resolution?

What are they trying to achieve it, and have they achieved it?

Forwards, Options, Delta Hedging. ANALYZE ALL! Is the 50% hedging suitable? Largest possible loss. Value at risk?

Costs of policies and policy action.
Risk-averseness (50% issue – why not more or less)
Compare against Big 4 as to what other policies/methodology they use .It’s good for sure but how can they improve on it?

4. If GM does deviate from its formal policy for its CAD exposure, then how should GM think about whether to use forwards or options for the deviation from the policy? [2 pages] [deviation: it’s the 50-75% change in hedge ratio] {Ryan} {Jason}

In order to determine whether to use forwards or options, it depends on a number of issues such as GM’s expectation on future spot rates and also their management’s level of risk adverseness. If GM wants to hedge exposure by limiting both the upside and downside of any fluctuation, they should go with forwards as a forward is an obligation at the maturity date. However by paying a small premium for an option, GM would be able to preserve the upside of any exposure. This is because an option gives them the right to choose whether to exercise it or not upon maturity. Hence, if the CAD dollar weakens against the USD, GM’s large Canadian assets and liabilities and payables owed to Canadian suppliers would weaken considerably. GM could then choose to exercise the option for a better exchange rate. Conversely, if the CAD dollar strengthens, then GM would choose not to exercise the option as their cash flows denominated in Canadian dollar is now worth more compared to the USD.

The level of risk adverseness plays a huge role because GM may be inclined to hedge all exposure using a forward if they are highly risk adverse. On the other hand, GM may be willing to pay a premium for an option to ensure the still receive the upside if they are not so risk adverse. This links to expectations on future spot rates and how GM anticipates the CAD to fluctuate vis-à-vis the USD in the coming months. If GM anticipates future spot rates of CAD/USD to weaken, it would prefer to buy a forward and the reverse holds true as well.

After conduction an analysis, it shows that the fluctuations in exchange rate could cause a lot of trouble for GM. Hence, it reverts back to the issue of GM’s expectations of the future spot exchange rate. From this, they can then determine which hedging method is more suitable. In addition, based on the analysis conducted in excel, it can be seen that there exists a point of indifference for GM between hedging using options and forwards. If GM’s expected spot exchange rate is exactly this, then they would be indifferent between to 2 methods under the assumption that the cost of the call option is negligible.

After conducting an analysis in excel using the given spot and forward rates, let us first discuss the findings of maintaining the 50% hedge. Based on the results shown above, if the CAD depreciates GM would choose not to exercise the call option and hence the forward hedge appears to be more suitable as it would cost GM lesser. However if the CAD appreciates, then GM would exercise the call option and using a call even with the premium of puchasing the option appears to be cheaper for GM compared to using forward hedging.

Look at trends for volatility increase? Is it more companies opened in canada?