mid test report gm
DESCRIPTION
Risk At GMTRANSCRIPT
MM – 6021
Enterprise Risk Management
Mid-Term Exam
Student Name: R.Indra Adika Putra
Student ID: 29114810
1st Semester – 2015/2016MASTER OF BUSINESS ADMINISTRATION
School of Business & ManagementINSTITUTE TEKNOLOGI BANDUNG
ITB School of Business and
YP-51
Lead the Future
EXECUTIVE SUMMARY
I. Objective
In September of 2001, Eric Feldstein, Treasurer and Vice President, Finance for General Motors, Corp. faced some risky situation which can interfere with the performance of the company, the foreign exchange problem. He had three risk management decision to make, what to do about :
GM's billion dollar exposure to the Canadian dollar GM's exposure to the Argentinean peso of light of the expected devaluation in the
months ahead. The continuing strategic concern about fluctuations in the Japanese yen.
As GM expanded around the world, the magnitude of its exposures to foreign currencies grew. The fluctuation of exchange rate created gains and losses that flowed through GM's reported income statement. GM's Treasurer's Office has a key function as financial risk management.GM Treasury Group-Functional Structure
For foreign exchange, all of GM'S hedging activities were concentrated in two centers: Domestic Finance group in NY ( North America, Latin America, Africa and the Middle East), The Second is ERTC in Europe (European and Asia Pacific ). FX hedging activities were segregated based on geographic correspondence between country a business unit was actually managed and where treasury for that business was controlledThe Corporate Hedging PolicyThe primary objectives of General Motor's FX risk management policy :
Reduce cash flow and earnings volatility. Minimize the management time and costs dedicated to global FX management Align FX management in manner consistent with how GM operates its automotive
business.
II. Analysis
Risk Identification
Based on "Foreign Exchange Hedging Strategies at General Motors, Companies are faced
with the same topic but with different conditions and situations. GM dealing with FX hedging
with different countries and situation. However , FX risk divide into 3 exposure, there are
Transactional , Translational, and Competitive.
The risk dimensional of the company in the GM cases are as follow:
Transactional exposure is the risk, faced by companies involved in international trade,
that currency exchange rates will change after the companies have already entered into
financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for
firms. Translational exposure is the risk that a company's equities, assets, liabilities or income
will change in value as a result of exchange rate changes. This occurs when a firm
denominates a portion of its equities, assets, liabilities or income in a foreign currency.
Whereas competitive exposure is exposure resulting from competing against companies with
different currencies, E.g. Japanese automakers and the depreciation of the yen.
Financial Risk
Market Risk
Interest Rate RiskFX Risk
Commodities Risk
Transactional Exposure
Translational Exposure
Competitive Exposure
Risk Identification Table
Code Description Impact Type Of Risk
C CAD Deviation Problem.
Because USD selected as
primary operating currency of
company, Obviously if
fluctuation of CAD:USD
happens, that will arise earning
volatility and affect on Income
Statement.
That will make the EPS volatility.
Generally, the more stable the
earnings of a corporation, the
more stable the price of its stock.
Investors prefer stocks with stable
prices and a steady uptrend. This
makes financial planning easier
and minimizes the risk of loss.
FX Risk
A Argentine Great Depression,
Devaluation peso (ARS)
against USD from 1 :1 to 2:1
all debts and expenses will be
growing twice, it also decreasing
earning of GM.
FX Risk
Financial Risk
J Yen Depreciation, It will
additional Gross Margin for
Japan Manufacturers, make it
lower price.
Gaining market share of Japanese
manufacturer, also reduction in
GM's unit sales and decreasing
net income.
Market Risk
Risk Assessment
After make risk identification list, we have to make criteria and scoring the Likelihood and
impact of event from risk identification table.
Likelihood Parameter
Criteria Score DescriptionHigh 9-10 Certainly will happenLikely 7-8 The most probable will
happenModerate 5-6 50% happen 50 % not happenUnlikely 3-4 Less likely will happenLow 1-2 Very unlikely to happen
Impact Parameter
Criteria Score DescriptionCatastrophic 9-10 >80% Loss of earningsMajor 7-8 61%-80% Loss of earningsMedium 5-6 41%-60% Loss of earningsMinor 3-4 21%-40% Loss of earningsInsignificant 1-2 0%-20% Loss of earnings
Risk Measurement
Code Description Impact Type Of
Risk
Likelihood Impact
C CAD Deviation Problem.
Because USD selected as
primary operating currency
of company, Obviously if
fluctuation of CAD:USD
happens, that will arise
earning volatility and affect
on Income Statement.
That will make the EPS
volatility. Generally, the more
stable the earnings of a
corporation, the more stable the
price of its stock. Investors
prefer stocks with stable prices
and a steady uptrend. This
makes financial planning easier
and minimizes the risk of loss.
FX Risk 5 8
A Argentine Great
Depression, Devaluation
peso (ARS) against USD
from 1 :1 to 2:1
All debts and expenses will be
growing twice, it also
decreasing earning of GM.
FX Risk
Financial Risk
4 10
J Yen Depreciation, It will
additional Gross Margin
for Japan Manufacturers,
make it lower price.
Gaining market share of
Japanese manufacturer, also
reduction in GM's unit sales
and decreasing net income.
Market Risk
FX Risk
5 6
Risk Mapping of General Motor Corp.
A
9
8 C
7
IMPA
CT
6 J
5
4
3
2
1 1 2 3 4 5 6 7 8 9 10
LIKELIHOODA=Argentina Case J=Japan Case C=Canada Case
Risk Mitigation
Code Description Impact Type Of Risk
Risk Mitigation Treatment
Risk Mitigation Description
C CAD Deviation
Problem. Because USD
selected as primary
operating currency of
company, Obviously if
fluctuation of
CAD:USD happens, that
will arise earning
volatility and affect on
Income Statement.
That will make the EPS
volatility. Generally,
the more stable the
earnings of a
corporation, the more
stable the price of its
stock. Investors prefer
stocks with stable
prices and a steady
uptrend. This makes
financial planning
easier and minimizes
the risk of loss.
FX Risk Transfer Forward
Contract
Option
Contract
A Argentine Great
Depression, Devaluation
peso (ARS) against
USD from 1 :1 to 2:1
All debts and expenses
will be growing twice,
it also decreasing
earning of GM.
FX Risk
Financial Risk
Transfer Debt Hedging
J Yen Depreciation, It
will additional Gross
Margin for Japan
Manufacturers, make it
lower price.
Gaining market share
of Japanese
manufacturer, also
reduction in GM's unit
sales and decreasing
Market Risk
FX Risk
Transfer/Control Swap
Agreement
Changing
Cost
net income. Structure
III. Conclusion and Recommendation
3.1 Conclusion
From the cases encountered General Motors Corp., they are faced with three different
conditions in which the first condition (Canada) GM to face the problem of currency
fluctuations CAD against the USD, resulting in earnings volatility. Earnings volatility would
affect the EPS and the stock price, investors prefer stocks with stable prices. To tackle the
problem GM Canada considering forward contract and option contract to fix earning
volatility problem.
In the second condition (Argentina), The Argentinean government is facing significant
financial problems which throws doubts on its default. The country has very poor economic
situation with no reforms and recent devaluation of currency has caused the managers to
think over the strategy that should be followed. The manager did perform some hedging
calculation though however hedging is used where there is risk in the short term and where
risk cannot be transferred. Hedging strategy of GM should not be altered in this regard
however by other options we can find a solution. Other options to deal with that could be
borrowing in the local currency as it minimizes the level of payments that should be remitted
to the parent.
In the third condition (Yen Depreciation), Depreciation in Yen leads to additional gross
margin for Japanese, and make it lower price in market and gaining market share of Japanese
manufacturer directly reduce the GM market share and profit. This is part of risk in
competitive exposure, exposure resulting from competing against companies with different
currencies .Competitive exposures are difficult to measure and hedge. Moreover, these can
evolve and change with time.
Due to its sizable foreign operations, the company faced significant amount of currency risk.
The company estimated that liability due to instruments with foreign currency exposure
was$13 billion in 2000. GM employed a variety of financial derivative products such as
forward contracts, swaps and options to hedge against foreign currency related losses.
3.2 Recommendation :
The company faces significant level of currency risk due to geographical representation in a
number of countries. The company has non centralized treasury function that has a number of
tasks that are performed non-centrally. The company should make it centralized fully and try
to net-off the amounts and should created best possible profitable results according to USD
not local currencies.
In CAD case, GM currently has hedge ratio of 50% and as we have seen the level of high
volatility due to lower level of hedge ratio we suggest change in it. The hedge ratio should at
least be 75% for commercial transactions to predict the results of earnings with more
certainty. That will make stability in stock price of GM and give a secure feeling of investor.
In Argentina case, GM have to minimizing the translational risks by borrowing in local
currency so that overall risk can be netted off. The company should also evaluate the
economical landscape of any country where it starts to work on because currencies are highly
volatile to the changes in economical factors.
In Yen depreciation case, Besides using conventional hedging method such as investments,
Yen financing, Changing cost structure, GM can also try a swap agreement with a party
facing counter risk on Yen dollar rate. The counterparty may be another exporter from Japan
who loses when yen dollar index goes down.