Home work3

pend on weighted factors such as cost transaction and the amount of money vis-à-vis the foreign exchange rate that is subject to probable risk of fluctuating. Hedging helps multinational firms mitigate losses from translational and transactional exposures. Unfortunately, it may end up reducing gains as well. If multinationals companies do not hedge their foreign exchange rate risk, they become vulnerable to a myriad of losses, which may affect devastatingly their financial performance across the world. Various determinants motivate hedging. One is factors surrounding the organization operation such as time minimization, cost reduction, and aligning business strategies. The other critical factor is the investment resources used in foreign exchange management, which is used in determining the amount of currencies transacted. The commercial (operational) exposures and financial exposures determine shapes the risks to hedge. For example, GM had to hedge against receivables and payables, which are operational exposures of at the region and financial exposures such as paying dividend.
General Motors foreign exchange hedging policy is streamlined to meet management objectives of efficiency and effectives in hedging e.g. minimize time, cost, and align foreign exchange management to automotive business. It is advantageous as it mitigates losses in transactional as well as translational exposures that are caused by fluctuating fx e.g. minimize cash flow as well as earnings volatility . The policy only controls fifty per cent of commercial exposure of a region as illustrated under the formula:
The hedge policy appears to be insufficient to cushion from most exposures. With the implied risk calculated on an annual basis, it is advisable for the company to extend hedging to cover 12 months rather than 6 months. In addition, the company should upsurge the exposure risk to over $ 5 million especially in the regions that have high volatility of foreign exchange rate of their