Gm Case Study

Solution 6

On page 4, the stated goal of GM is to actively manage liabilities and take advantage of cyclicality and volatility in interest rates and shifts in the yield curve. It is said that there is a fine line between risk management and speculation. It is also notoriously difficult to forecast interest rates. With these statements in mind, comment of GM’s stated goal.

Risk management is a rechnique where in a company tries to minimize the financial risk by taking various financial decisions. In the case of speculation, there is no inherant risk on the company but they take a decision by forecasting the movements of the underlying. In the case of risk management, there is a risk that the company carries and tries to minimize it.

In this case, it is being said that the company is trying to take advantage of the cyclicity. The interest rate in the economy is a volatile component. The company wants to issue more liabilities when the interest rate is low and would like to redeem when the rates are high. This is the stated goal of the company.

Solution 7

Suppose that it is true that a 1% decrease (increase) in auto loan rates results in a 0.2% increase (decrease) in the dollar volume of cars sold and operating profits. Is a mix of fixed and floating-rate debt consistent with GM’s stated objective?

When the interest rate increase in the economy, the company, as per the stated goals, would like to redeem liabilities from the economy. This means the cash would dry up from the company. At the same time, due to increase in rates, demand will decrease. This clearly means decrease in revenue  for the company. Decrease in cash (or liquidity) combined with decreased in revenue would mean problems for the company. They might not be able to serve the interest and the principal payments and there is a high possibility of default. Hence, the goal is not consistent with the market data.