Case | HBS Case Collection | March 2005 (Revised January 2006)

Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures

by Mihir A. Desai and Mark Veblen

Abstract

How should a multinational firm manage foreign exchange exposures? Examines transactional and translational exposures and alternative responses to these exposures by analyzing two specific hedging decisions by General Motors. Describes General Motors' corporate hedging policies, its risk management structure, and how accounting rules impact hedging decisions. Although the overall corporate hedging policy provides a consistent approach to the foreign exchange risks that General Motors must manage, the company also has to consider deviations from prescribed policies. Describes two such situations: a significant exposure to the Canadian dollar with adverse accounting consequences and GM's exposure to the Argentinean currency when devaluation is widely anticipated. Students must evaluate the risks General Motors faces in each situation and consider which hedging strategy--if any--might be appropriate. Additionally, asks students to analyze the financial costs and accounting treatment of alternative derivative transactions for hedging purposes. A rewritten version of an earlier case.

Keywords: Multinational Firms and Management; Currency Exchange Rate; Expansion; Credit Derivatives and Swaps; Financial Management; Investment Funds; Risk and Uncertainty; International Finance; Auto Industry;

Citation:

Desai, Mihir A., and Mark Veblen. "Foreign Exchange Hedging Strategies at General Motors: Transactional and Translational Exposures." Harvard Business School Case 205-095, March 2005. (Revised January 2006.)