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Executive Summary
Company Objective
Introduction
General Motors has to manage alternative
responses to these exposures by analyzing
specific hedging decisions and alternatives
Transactional
Exposure
Competitive
Exposure
Translational
Exposure
GMs exposure
to Canadian
dollar with
adverse
accounting
consequences
CAD
GMs exposure
to the
Argentinean
peso when
devaluation is
widely
anticipated
ARS
GMs exposure
to the Japan
Yen are
depreciating
widely
acknowledged
JPY
Internal Environment
Internal Environment
ERM Philosophy
As GM expanded around the world, the magnitude of its exposure to foreign currencies grew.
Exchange rate swings through GMs reported income statement.
Risk Appetite
GM is exposed to financial risk as it strives to achieve the company objectives.
GMs financial risk appetite is a high that appropriate to expand around the world.
Board Oversight
Risk Management Committee, which was composed of six of GMs most senior executive (CFO,
General Auditor, CAO, Chief Economist, Senior Executive GMAC,GMs Financial Service
Subsidiary).
Treasury team is responsible for all of GMs monetary transactions and for managing the
myriad risks.
Objective Setting
Strategic
External
Reporting
Internal
Event Identification
Financial Risk
General
Market Risk
Foreign
Exchange Risk
Translation
Exposure
Transaction
Exposure
Economic
Exposure
The exchange rate swings created gains or losses that flowed through GMs
reported income statement Foreign Exchange Risk
Explanation
Canadian
Dollar
Transaction
Exposure
Argentina
Peso
Economic
Exposure
Japanese
Yen
Translation
Exposure
Economic Exposure
Transaction Exposure
Definition. A firm has transaction exposure
whenever it has contractual cash flows (receivables
and payables) whose values are subject to
unanticipated changes in exchange rates due to a
contract being denominated in a foreign currency.
Translation Exposure
Definition. A firm's translation exposure is the extent to which its
financial reporting is affected by exchange rate movements. As
the consolidation process for multinationals entails translating
foreign assets and liabilities or the financial statements of foreign
subsidiaries from foreign to domestic currency.
While translation exposure may not affect a firm's cash flows, it
could have a significant impact on a firm's reported earnings and
therefore its stock price.
Translation Exposure
Accounting
Treatment
Reporting
Risk Assessment
Identify Risk
No
Risks
Impact
In income statement,
when CAD appreciate
EPS decline and vice
versa
Decrease shareholder
equity when
consolidated GM
report
Risk Mapping
LIKELIHOOD
SEVERITY
Critical
(5)
Very Serious
(4)
Serious
(3)
Marginal
(2)
Negligible
(1)
Frequent
(5)
25
Operation not
permissible
20
Operation not
permissible
15
High priority
10
Review at
appropriate time
5
Risk acceptable
Moderate
(4)
20
Operation not
permissible
16
Operation not
permissible
12
High priority
8
Review at
appropriate time
4
Risk acceptable
Occasional
(3)
15
High priority
12
High priority
9
Review at
appropriate time
6
Risk acceptable
3
Risk acceptable
Remote
(2)
10
Review at
appropriate time
8
Review at
appropriate time
6
Risk acceptable
4
Risk acceptable
2
Risk acceptable
Unlikely
(1)
5
Risk acceptable
4
Risk acceptable
3
Risk acceptable
2
Risk acceptable
1
Risk acceptable
Likelihood Table
Likelihood
Level
Frequent
Moderate
Occasional
Remote
Unlikely
Severity Table
Severity
Level
Indicator
Critical
Bankruptcy
Very serious
Serious
Marginal
Negligible
Risk Assessment
No
Risk
Likelihood
Impact
Score
20
12
Risk Mapping
SEVERITY
Critical
(5)
Frequent
(5)
LIKELIHOOD
Moderate
(4)
Occasional
(3)
Remote
(2)
Unlikely
(1)
Very Serious
(4)
Serious
(3)
Marginal
(2)
Negligible
(1)
Action Table
Colour
Score
Risks
Action
16-25
Critical
12-15
High
8-10
Medium
1-6
Low
Risk Response
Risk
Appetite
GM is exposed to financial risk as it strives to
achieve the company objectives.
GMs foreign exchange risk appetite is a high that
appropriate to expand around the world.
Risk Tolerance
A tolerance +/- 5% was therefore allowed in
matching the delta hedge ratio cover of the actual
portfolio to the cover of the benchmark portfolio.
Risk Response
List of
risk
Control Action
Japanese
Yen
Frequent
(5)
LIKELIHOOD
Moderate
(4)
Very Serious
(4)
Serious
(3)
Marginal
(2)
Occasional
(3)
Remote
(2)
Unlikely
(1)
Negligible
(1)
Control Activities
Treasury
Monitoring
Currency exposure is inevitable when doing
business in foreign markets. So GMs monitoring
through Passive Hedging Management
Monitoring (cont)
Passive Hedging Management
The second objective was a
consequence of an internal study
that determined that investment
of resources in active foreign
exchange management had not
resulted in significant
outperformance of passive
benchmarks
Conclusion
GM faces significant level of currency risk due to
geographical representation in a number of
countries
It was important to understand not just what the
policy permitted, but what the economics of each
exposure were what was best for GM as a
consolidated global entity in each case.
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
Recommendation
The company should
make centralize
treasury function
with centralized fully
and try to net-off the
amounts and should
created best possible
profitable results
according to USD not
local currencies.
Reference
http://www.coso.org/documents/COSO_ERM_ExecutiveSummar
y.pdf
https://en.wikipedia.org/
http://www.investopedia.com/