YP-51

ITB School of Business and Management

Lead the Future

MM 6021
Enterprise Risk Management
Mid-Term Exam

Student Name: R.Indra Adika Putra

Student ID: 29114810

1st Semester 2015/2016

MASTER OF BUSINESS ADMINISTRATION

School of Business & Management

INSTITUTE TEKNOLOGI BANDUNG

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 controlled
The Corporate Hedging Policy
The 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:

Financial Risk

Market Risk

Interest Rate Risk

FX Risk

Commodities Risk

Transactional
Exposure
Translational
Exposure
Competitive
Exposure

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.

Risk Identification Table

Code
C

Description
CAD Deviation

Impact
Type Of Risk
Problem. That will make the EPS volatility. FX Risk

Because

USD

selected

as Generally, the more stable the

primary operating currency of earnings of a corporation, the

company,

Obviously

fluctuation

of

if more stable the price of its stock.

CAD:USD Investors prefer stocks with stable

happens, that will arise earning prices and a steady uptrend. This
volatility and affect on Income makes financial planning easier
A

Statement.
and minimizes the risk of loss.
Argentine Great Depression, all debts and expenses will be FX Risk
Financial Risk
Devaluation
peso
(ARS) growing twice, it also decreasing
against USD from 1 :1 to 2:1
earning of GM.
Yen Depreciation, It will Gaining market share of Japanese Market Risk
additional Gross Margin for manufacturer, also reduction in
Japan Manufacturers, make it GM's unit sales and decreasing
lower price.

net income.

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
High
Likely

Score
9-10
7-8

Moderat
e
Unlikely
Low

5-6
3-4
1-2

Description
Certainly will happen
The most probable will
happen
50% happen 50 % not
happen
Less likely will happen
Very unlikely to happen

Impact Parameter
Criteria
Catastrop
hic
Major

Score
9-10

Description
>80% Loss of earnings

7-8

Medium

5-6

Minor

3-4

Insignifica
nt

1-2

61%-80%
earnings
41%-60%
earnings
21%-40%
earnings
0%-20%
earnings

Loss

of

Loss

of

Loss

of

Loss

of

Risk Measurement
Code Description

Impact

Type
Risk

Of Likelihood

Impact

CAD Deviation Problem.

That

Because USD selected as

volatility. Generally, the more

primary operating currency

stable

of company, Obviously if

corporation, the more stable the

fluctuation of CAD:USD

price of its stock. Investors

happens, that will arise

prefer stocks with stable prices

earning volatility and affect

and a steady uptrend. This

on Income Statement.

makes financial planning easier

Argentine
Depression,

Devaluation

make

the

the

earnings

EPS
of

and minimizes the risk of loss.

All debts and expenses will be
growing

twice,

it

also

decreasing earning of GM.

from 1 :1 to 2:1
Yen Depreciation, It will

Gaining

market

additional Gross Margin

Japanese

manufacturer,

for Japan Manufacturers,

reduction in GM's unit sales

make it lower price.

and decreasing net income.

share

FX Risk

FX Risk
Financial Risk

10

Market Risk
FX Risk

peso (ARS) against USD

of
also

Risk Mapping of General Motor Corp.

A
9

8
7

TIMPAC

Great

will

6
5
4
3
2
1
1

1
0

LIKELIHO
OD
A=Argentina Case
Risk Mitigation

J=Japan Case

C=Canada Case

Code Description
C

CAD

Impact

Type
Risk

Of Risk Mitigation Risk Mitigation

Treatment
Description
Deviation That will make the EPS FX Risk
Transfer
Forward

Problem. Because USD

volatility.

selected

the more stable the

as

primary

Generally,

operating currency of

earnings

company, Obviously if

corporation, the more

fluctuation

of

stable the price of its

CAD:USD happens, that

stock. Investors prefer

will

stocks

arise

earning

of

with

Contract
Option
Contract

stable

volatility and affect on

prices and a steady

Income Statement.

uptrend. This makes

financial

planning

easier and minimizes

Great

the risk of loss.

All debts and expenses

Depression, Devaluation

will be growing twice,

peso

it

Argentine
(ARS)

against

also

earning of GM.
Gaining market share

additional Gross Margin

of

for

manufacturer,

Japanese
also

Manufacturers, make it

reduction in GM's unit

lower price.

sales and decreasing

net income.

Transfer

Market Risk
FX Risk

Transfer/Control Swap

Debt Hedging

decreasing

USD from 1 :1 to 2:1

Yen Depreciation, It will
Japan

FX Risk
Financial Risk

Agreement
Changing
Cost
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.