Macs hedge foreign exchange rate risk? Multinational firms hedge foreign exchange risk In order to ensure operational and financial functionality. A NC should hedge foreign exchange risk so It can prevent cash flow effects of the foreign firm and the decline in value of the equity holder because of the movements in exchange rates. It will also help them to reduce transaction costs when obligated to make payments in different currencies, and it offers companies better ways to analyze and evaluate different operations by making absurdity comparison easier.
Companies can better manage future foreign investments and have better control of capital management needs. Exhibit 2 and Exhibit 3 show the importance of hedging in Gem’s case. If not, what are the consequences? If so, how should they decide which exposure to hedge? If a NC does not hedge It might end up with its cash flow being volatile, and intense volatility In foreign exchange may distort the cash flow. A company’s cash flow from operations can be stable but exchange losses or gains will affect the net Income tenement and the shareholder’s equity.
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As foreign currency risks affect companies’ income statements and balance sheet accounts which is called translation exposure, companies need to focus on the managing of foreign currency risk given their industry related necessities, operations’ tolerance to volatility, and according to their contractual agreements with clients and creditors. Foreign currency risk might also affect companies’ existent obligations and agreements denominated in foreign currencies along, eventually affecting firms’ earnings and cash flow which is called ramifications exposure.
Besides considering transaction and translation exposure, a company should also consider impacts in prospective revenue and expenses, earnings and cash flow, equity and enterprise value which Is called operating exposure. Thus, companies should decide to hedge their exposure according to the volatility of each exposure category and use either passive or active hedging strategies. What do you think of Gem’s foreign exchange hedging polices? Would you advise any changes?
As it is mentioned in the case itself “GM s current foreign exchange policies re in place to meet three major objectives : 1 ) to reduce cash flow and earnings volatility , 2 ) to minimize management time and costs associated with FAX management , 3 ) and to align FAX policy with how Gm operates its core businesses . GM currently only chooses to hedge cash flows, or transaction exposures, and does not manage balance sheet, or translational, exposures “. Their foreign risk exposure spins mainly around their domestic currency (SUDS) against fluctuations of the Canadian Dollar,Japanese Yen and Argentina Peso.
With their passive policy, they edge only 50 of commercial or operating exposures on a regional level. Their hedging policies should consider hedging on a Global Perspective instead of a Regional Basal silence tenet quadrilles operate In multiple territories around t world. And even though each subsidiary might have its own mission statement and objectives, not considering global implications Just because of that matter could translate in substantial risk. Because the company relies much on passive hedging approaches since its abandonment of actively managed risk management decisions.
Therefore, I would suggest integration of active strategies considering the expected results and actual outcomes between actively and passively managed strategies. Should GM deviate from its policy in hedging its CAD exposure? Why or Why not? I think they should deviate from its policy in hedging its CAD exposure to account for the balance sheet effect. If GSM deviates from its policy for its Cad exposure, they may increase options in its hedge. It would allow GM to sell buy call/options to counter the effects of the hedge.