Foreign Exchange hedging strategies at General Motors: Competitive Exposure

Case Brief: The case deals with the effects of currency fluctuations on the valuation and
competencies of multinational enterprises. The study analyses the impact of depreciation of
Japanese Yen on the valuations of General Motors, which is one of the three major US based
automakers based out of Detroit. Apart from transactional losses that are easy to calculate and
manage, a new risk of loss of cost competency as compared to Japanese automakers is explored.
The risk arises from the fact that lower valuations for Japanese Yen would make certain inputs
cheaper for Japanese automakers as compared to their US counterparts. This gives them a
significant cost advantage which may ultimately result in lowering of prices and loss of market
share for General Motors in a highly price sensitive market for automobiles.
Proposed Analysis: The group intends to estimate the risk of competitive exposure through two
different approaches:
(a) Approach using exposure estimates from the case
(b) Approach using linear regression based on market data

(a) Approach using exposure estimates from the case: We intend to estimate the risk of
competitive exposure on the basis of approach suggested in the case. The loss of valuation is
taken as the quantified proxy for the discussed competitive exposure. The flowchart used for
the calculation of value erosion as suggested in the case is as follows:
Depreciation in JPY

Addition Gross Margin for Japanese Manufacturers

Benefit passed to customers in the form of lower prices
Gain in Market Share as a result of lower prices
Erosion of GMs Market Share
Lower Profits for GM
Reduction in Market Valuation of GM

(b) Approach using linear regression based on market estimates: In this approach, we shall be
using data of General Motors of sales, transactional and translational losses and the USD/JPY
exchange rate and regressing these factors against the set proxy for loss due to competitive
exposure to estimate the extent of risk.
Apart from estimating the risk exposure, the group shall also analyze the effective ways and
methods to handle the resulting exposure. Possible methods shall be studied for their pros and
cons and we intend to recommend the solution we find most feasible to manage the resulting
exposure.

*******

Submitted by:
Inderjot Kaur Brar (PGP29196) | Syed Danish Hasan (PGP29194) | Sumit Jain (PGP29228)
Hansneet Kalra (PGP29232) | Amit Kumar (PGP29229)