Gm Management Policy

3. What has to be considered in developing a hedging policy?

The company will need to take the following factors into consideration when deciding on a hedging policy for the firm:

Significance and size of the impact

Firms should first determine how exposures of the firm will effect it in terms of earnings, cash flow and firm value. Tools such as value at risk, sensitivity analysis and currency volatility can be used . The key is determining exposures that have the potential of having a significant negative impact and these exposures should be hedged.

Hedging costs

There are direct and indirect costs involved in hedging the exposures. The direct costs such as option premiums and indirect costs such as the costs of management time and effort and human capital involved in carrying out hedging activities. The hedge should be undertaken when the benefits are greater than the costs.

3.Firm risk management policy

Most mature firms have an established risk management policy for the firm with guidelines for hedging various risks. These guidelines lay down an outline for the firm to hedge its risks. The firm usually has a priority for certain types of risk exposures which take precedent in cases when conflicts arise in terms of hedging different risks.

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

Feldstein was aware of the fact that GM's passive hedging policy called for hedging 50% of the CAD 1.7 billion cash-flow-exposure-projected-over-the-subsequent twelve months. Nonetheless Feldstein acknowledged that GM's policy of not hedging the translation exposure stemming from the CAD 2.1 billion net monetary liability left a large CAD exposure that could impact GM's year-end financial results significantly. Feldstein met with his FX and Commodities Manager, Doug Oysterman. Ostermann was proposing to increase the hedge ratio for the CAD to the maximum allowed under GM policy-75%. The table below shows the impact of the 75% hedge ratio to the 50% hedge ratio along with the EPS based on a 3.1% volatility in the CAD/USA exchange ratio. We can observe that there is reduction in the volatility of Net income and EPS when the hedge is 75% of the commercial exposures. Therefore, we propose that hedge ratio be increased to 75% by deviating from the current policy.