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Should GM deviate from its policy in hedging its CAD exposure? Why or why not? refer...

Should GM deviate from its policy in hedging its CAD exposure? Why or why not?

refer to case study of Foreign Exchange Hedging Strategies at General Motors

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Answer #1

GM must deviate from its policy in hedging its CAD exposure. As per the stated policy, only 50% of the exposure will be hedged. GM’s exposure to CAD amounts to CAD 1.7 billion so as per the policy, amount to be hedged would equal CAD 0.85 billion. On the other hand, only transactional exposures will be hedged. These factors would lead to a net monetary liability exposure and in case of depreciation of Canadian Dollar; significant reduction in equity is possible. However, such a deviation would be consistent with their policy. GM would only be hedging their transactional exposure, which will eventually result in the hedging of their transactional exposure.

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