Hedging In Gm Essay

2468 words - 10 pages

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Executive Summary

Question A

Q1
Foreign exchange risk involves financial risk posed by an exposure to unanticipated changes in currency exchange rates.
General Motor is one of the largest automakers in the world offering a comprehensive range of vehicles in more than 120 countries around the world. General Motors ...view middle of the document...

They also decided not to hedge translation exposure.
Q2
Translation Exposure

Since USD was effectively the primary operating currency of the Canadian subsidiary functional currency, it is also the functional currency of the Canadian subsidiary. Therefore, temporal method should be used in consolidating the financial statements, which will affect GM’s income statement and, ultimately, be reflected in shareholder’s equity.

Below is the analysis of how a 3.1% CAD depreciation/appreciation will impact on GM’s worldwide pre-tax income and its Earnings per Share (EPS) assuming a spot rate of CAD1.5621/USD.

With current spot rate (CAD 1.5621/USD):
CAD Monetary asset/(liability) position | -2143.0000 | million | CAD |
GM worldwide pre-tax income | 7164.0000 | million | USD |
GM worldwide Net Income | 4452.0000 | million | USD |
Earnings attributable to common stocks | 4342.0000 | million | USD |
outstanding shares | 550.0000 | million | |
EPS | 7.8945 | | USD |

Post CAD depreciation:
spot rate post 3.1% CAD depreciation | 1.6105 | | CAD/USD |
CAD monetary position in USD | -1330.6219 | million | USD |
difference in monetary position in USD | 41.2493 | million | USD |
GM worldwide pre-tax income | 7205.2493 | million | USD |
GM worldwide Net Income | 4493.2493 | million | USD |
Earnings attributable to common stocks | 4383.2493 | million | USD |
EPS | 7.9695 | | USD |

Post CAD appreciation:
spot rate post 3.1% CAD appreciation | 1.5137 | | CAD/USD |
CAD monetary position in USD | -1415.7598 | million | USD |
difference in monetary position in USD | -43.8886 | million | USD |
GM worldwide pre-tax income | 7120.1114 | million | USD |
GM worldwide Net Income | 4408.1114 | million | USD |
Earnings attributable to common stocks | 4298.1114 | million | USD |
EPS post CAD appreciation | 7,8147 | | USD |

The overall difference considering a 3.1% CAD depreciation of the current spot rate of CAD 1.5621/USD would increase the earnings per share (EPS) from 7.8945 USD to EPS of 7.9695 USD.
On the other hand, considering a CAD appreciation of 3.1% of the current spot rate would decrease the EPS from 7.8945 USD to EPS of 7.8147 USD.
Therefore it can be argued that it only affects the EPS but there is no cash flow associated.
* Since EPS only demonstrates the profit allocated to each outstanding share of common stock. Earnings per share serve as an indicator of a company’s profitability (Investopedia, 2013).
* There is still an impact on GM consolidated statement
* It affects net income and consequently EPS

Q3
* It’s just about transaction exposure because translation is not being hedged.
According to GM Canada’s projected cash flow exposure, shown in exhibit 9 in the case study, the 12 month Canadian $ cash flow forecast is running at C$ 1,682 million.
Since the company is facing such a high exposure, GM’s management is considering deviating from its...

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