R I S K I N D E N T I F I C AT I O N , R I S K M E A S U R E M E N T , R I S K M A P P I N G

GENERAL MOTOR RISK

Syndicate 6

A L F I A N D I I . M AWA R D I 2 9 1 1 2 4 9 1A N A S I A P U S PA 2 9 1 1 2 4 7 7

C H R I S T I A N I N GT YA S A . P. P2 9 1 1 2 5 4 6

F E R RY K R I S N A 2 9 1 1 2 4 7 9H E N N Y Z A H RA N Y 2 9 1 1 2 5 5 1I N KA B A H A R 2 9 1 1 2 4 4 3

GENERAL MOTOR RISK

Syndicate 6

INTRODUCTION

General Motors was the world’s largest automaker in 2001 with 15.1% market share. GM was founded in 1908. GM had manufacturing operations in more than 30 countries, and its vehicle were sold in approximately 200 countries.Eric Feldstein had three risk management decisions to make: what to do about (i) GM’s billion dollar exposure to the Canadian dollar, (ii) GM’s exposure to the Argentinean peso in light of the expected devaluation in the months ahead, 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.

CORPORATE HEDGING POLICY

Three Primary Objectives:1. Reduce cash flow and earnings volatility2. Minimize the management time & cost in FX

management3. Align FX management that consistent with how

GM operates its automotive business

CORPORATE HEDGING POLICY (2)

• Translation exposures are ignored• Functional currency: Primary operating currency • Passive hedging is preferred over active• 50% forward contracts (1-6 months), and• 50% options (months 7-12)• Combined hedge, the options: 25% of hedge

position• Rolling forward creates over or under hedge• Average delta hedge ratio is 37,5% (tolerance +/-

5%)

RISKS FROM FX MANAGEMENT

1. Transactional Exposures Debts and A/R Affect income statement2. Translational Exposures3. Operational Exposures

OBJECTIVES

• Risk Identification• Risk Measurement• Risk Mapping

FOREIGN CURRENCY EXPOSURE – CAD EXPOSURE

• Functional currency: US Dollar (Despite large CAD asset & liabilities)• Projected Cash Flow Exposure: 1,7 Bill CAD• Net monetary asset/liability: 2,1 Bill CAD• Propose to hedge up to 75%, as the policy didn’t

allow for Translation exposure

COMPARISON HEDGE RATIO 50% 75%

3.1% Stronger

3.1% Weaker

3.1% Stronger

3.1% Weaker

Commecial exposure

12-month rolling net receivables forecast (CAD) -1,682 -1,682 -1,682 -1,682

Notional hedge amount at hedge ratio (CAD) -841 -841 -1,261 -1,261

Net Cash (CAD) - -    

FX hedge put in place (CAD) 841 841 1,261 1,261

       

Net FX exposure (CAD) -841 -841 -420 -420

GM Worldwide US GAPP FX exposure

GM Worldwide US GAPP FX exposure (CAD) -2,143 -2,143 -2,143 -2,143

Earnings Impact on GM Worldwide

GM Worldwide FX gain/loss -43.4 40.8 -43.4 40.8

FX gain/loss on hedges 17 -16 25.6 24

GM Worldwide pre-tax income impact -26.4 24.8 -17.9 16.8

GM Worldwide after-tax (35%) income impact -17.2 16.1 -11.6 10.9

EPS (550 million shares outstanding) -0.031 0.029 -0.021 0.020

USING FORWARD & OPTIONS TO HEDGE

1.4 1.5 1.6 1.7 1.8

-2000000

-1500000

-1000000

-500000

0

500000

1000000

1500000

2000000

ExposureExp + OptionExp + Forward

Exchange Rates

Cash Flow

FORWARD OR OPTIONS?

• Options: higher payoff when the CAD depreciates, higher loss when the CAD apreciates. • Considering the volatility and the premium cost,

forward contracts are more desirable. • But, option contracts, in this case, are a more

flexible choice that cost GM only the premiums, but can be easily traded in the market • Forward contracts, on the other hand, are a fixed

obligation locked in with a large notional amount.

D E VA LU AT I O N R I S K

ARGENTINEAN PESO

HEDGE IN 1- 6 MONTHS

HEDGE IN 6-12 MONTHS

HEDGE IN AFTER 12 MONTHS

J PY C U R R E N CY R I S K

COMPETITIVE EXPOSURES

COMPETITIVE EXPOSURES (1)

1 JPY content per vehicle 30%2 JPY devaluation 20%3 Cost savings passed on to costumer 30%4 Vehicle price reduction (1*2*3) 1.80%     4 Vehicle price reduction 1.80%5 Sales elasticity 26 Japanese Annual Sales in US (units) 4100000

7 Increase in Japanese Sales (units) (4*5*6) 147600

COMPETITIVE EXPOSURES (2)

7 Increase in Japanese Sales (units) 147600

8 JPY sales cross elasticity to GM 33%9 Loss in GM sales (7*8) 49200     9 Loss in GM sales (7*8) 4920010 GM unit contribution margin $ 5,966.67

11 GM pre-tax loss (millions) (9*10) $ 293.56      

12 Discount rate 20%13 Present value of loss (millions) $1,467.80

YEN EXPOSURE

AFFILIATE EXPOSURE TOTAL YEN EXPOSURE ($ BILLION)

AFFILIATE

AFFILIATE EXPOSURE

GM SHAR

EGM Affiliate Exposure

FUJI -1.5 20% -0.30

ISUZU -1.02 49% -0.50

SUZUKI -0.09 20% -0.02

TOTAL -0.82

Competitive exposure 1.47

Commercial exposure 0.90

Affiliate investment exposure

-0.82

JPY bonds exposure -0.50

TOTAL 1.05

RISKS SCORE

No Risk Type Probability Impact Score

1CAD RISK Transaction

Translation 4 10 40

2ARS RiskDefault & Devaluation 10 3 30

3JPYCompetitive risk/currency risk 9 5 45

RISK MAP MODEL

• CAD: Significant risk that’s unlikely to happen• JPY & ARS: Risks that happen from day to day

CONCLUSION• General Motor is a multinational company that closes with

global operation risks, such as transactional, translation and economic

• Hedging strategies will help GM to mitigate all risks that appeared in global operation if GM does those strategies correctly. Failure hedge may results a volatile cash flow and makes losses in net income and shareholder’s equity

• CAD transaction risk by using the 50% hedge ratio, the currency exposure could gain higher profit but more volatile. In contrast, by using the 75% hedge ratio, the currency exposure possible gains lower profit but less volatile.

• So that, higher hedge ratio may acquire less volatile with more hedging cost.

CONCLUSION

• Between option and forward contract, Forward contract has beneficial gains that considered in the volatility and the premium cost• In Argentina, to mitigate this devaluation risk, GM

could choose the shortest hedging process to reduce the hedging cost (hedge in 6-12 month)• Base on risk mapping analysis, JPY and ARS has

low significant risk but its happen day by day. In contrast, CAD has significant risk that seldom to happen

RECOMMENDATION

• Hedging shouldn’t be interpreted as an all access pass to risk-taking. It has to be fully responsible

• GM should implement a strategy of paying its employees and suppliers based on the real exchange rate between Peso and Dollar, calculated by comparing the PPPs of both countries.

• It should also demand its receivables from the Argentinean government instantly, in order to convert them into USD before devaluation. If it is not possible, it can enter into a forward contract with the government at a predetermined exchange rate, in order to partially offset its exposure.

RECOMMENDATION

• Ongoing translational exposure will affect the book value of assets and liabilities over a period of time. They are largely affected by medium-term volatility and should be hedged using one-year forward contract.