Corporate
Risk
Management
@ EDHEC
Corporate Risk Management
Prof. Schroth
MSc in Corporate Finance & Banking
EDHEC Business School
Enrique Schroth
Professor of Finance
EDHEC Business School
FOREX Hedging at General Motors:
Competitive Exposures
18-19 October 2022
1 / 14
Agenda
Corporate
Risk
Management
@ EDHEC
Prof. Schroth What kind of risks do FX pose for multinationals (MNCs)?
Q1 How should a MNC design a risk management policy for
FX?
Q2 How would you evaluate GM’s hedging policy?
Q3 How is GM exposed to the yen?
Does GM’s exposure to the yen arise from specific foreign
transactions?
2 / 14
Type of FX exposure
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 Transactional exposures: arising from real transactions;
2 Competitive exposures: real and economic but indirect,
arising from competitive interactions.
3 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge?
4 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge? Trasactional exposures only.
2 How much to hedge?
4 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge? Trasactional exposures only.
2 How much to hedge? 50%, ‘passively.’
3 How to hedge?
4 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge? Trasactional exposures only.
2 How much to hedge? 50%, ‘passively.’
3 How to hedge? Forwards, 0 to 6 months; options, 6 to
12 months.
4 Where to hedge?
4 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge? Trasactional exposures only.
2 How much to hedge? 50%, ‘passively.’
3 How to hedge? Forwards, 0 to 6 months; options, 6 to
12 months.
4 Where to hedge? Regionally, tactically.
5 When to deviate?
4 / 14
FX Hedging Q&A by GM
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
1 What to hedge? Trasactional exposures only.
2 How much to hedge? 50%, ‘passively.’
3 How to hedge? Forwards, 0 to 6 months; options, 6 to
12 months.
4 Where to hedge? Regionally, tactically.
5 When to deviate? Try to stay passive.
4 / 14
GM’s Competitive Risk
458 R. Williamson / Journal of Financial Economics 59 (2001) 441}475
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
Fig. 3. U.S. automobile market share. The "gure shows the market share of U.S., Japanese, and
German "rms in the United States for the sample period. The "rms are listed by the headquarters of
the parent "rm. The graph re#ects the automobile market share, and does not re#ect that of light
trucks, which are becoming a higher percentage of vehicle sales for each "rm.
is used. For the
Source: Williamson, R., ‘Exchange Japanese
rate and German
exposure and markets the monthlyevidence
competition: market share valuesthe automotive industry,’
from
are obtained by using the annual seasonality factor for each country. Therefore,
Journal of Financial Economics 59, p.453.
the market shares for both the Japanese and German markets only change
annually. A similar regression model for the Japanese portfolio is evaluated with
the appropriate adjustments for the exchange rate and market share; 5 / 14
Economic exposure: Tracing the chain of
events
Corporate
Risk
Management
@ EDHEC
Prof. Schroth A depreciation of the Japanese Yen (JPY) would lead to
⇒ Higher gross margins to Japanese automakers selling in
the USA;
6 / 14
Economic exposure: Tracing the chain of
events
Corporate
Risk
Management
@ EDHEC
Prof. Schroth A depreciation of the Japanese Yen (JPY) would lead to
⇒ Higher gross margins to Japanese automakers selling in
the USA;
⇒ Japanese automakers could pass along some of this benefit
to consumers via price reductions;
6 / 14
Economic exposure: Tracing the chain of
events
Corporate
Risk
Management
@ EDHEC
Prof. Schroth A depreciation of the Japanese Yen (JPY) would lead to
⇒ Higher gross margins to Japanese automakers selling in
the USA;
⇒ Japanese automakers could pass along some of this benefit
to consumers via price reductions;
⇒ Japanese automakers would gain market share in the USA,
decreasing GM unit sales;
6 / 14
Economic exposure: Tracing the chain of
events
Corporate
Risk
Management
@ EDHEC
Prof. Schroth A depreciation of the Japanese Yen (JPY) would lead to
⇒ Higher gross margins to Japanese automakers selling in
the USA;
⇒ Japanese automakers could pass along some of this benefit
to consumers via price reductions;
⇒ Japanese automakers would gain market share in the USA,
decreasing GM unit sales;
⇒ GM profits would decrease;
6 / 14
Economic exposure: Tracing the chain of
events
Corporate
Risk
Management
@ EDHEC
Prof. Schroth A depreciation of the Japanese Yen (JPY) would lead to
⇒ Higher gross margins to Japanese automakers selling in
the USA;
⇒ Japanese automakers could pass along some of this benefit
to consumers via price reductions;
⇒ Japanese automakers would gain market share in the USA,
decreasing GM unit sales;
⇒ GM profits would decrease;
⇒ GM’s market value would decrease.
6 / 14
Measuring JPY’s competitive exposure
Corporate
Risk
Management
@ EDHEC Competitive Exposure Estimation to the Yen (JPY)
Prof. Schroth
JPY content per vehicle 30,00% [(1) Sensitivity range in p.3]
JPY devaluation 20,00% [(2) GM assumption in p.4]
Cost savings passed on to consumer 30,00% [(3) Sensitivity range in p.4]
Vehicle price reduction 1,80% [(4) = (1) x (2) x (3)]
Sales elasticity 2 [(5) Assumption in p.4]
Annual sales of Japanese cars in US (units)
4 100 000 [(6) In p.3]
Increase in sales of Japanese cars 147 600 [(7) = (4) x (5) x (6)]
Cross-elasticity to GM 33,33% [(8) In p.4]
Loss in GM sales (units) 49 200 [(9) = (7) x (8)]
GM unit contribution margin $ 6 000,00 [(10) = 1969 / (1/3), in Exhibit 6]
GM pre-tax loss (millions) $ 295,20 [(11) = (9) x (10)]
Discount rate for a perpetuity 20,00% [(12) GM assumption in p.4]
Present value of loss (millions) $ 1 476,00 [(13) = (11) / (12)]
7 / 14
Sensitivity analysis of JPY’s competitive
exposure
Corporate
Risk
Management
@ EDHEC
Prof. Schroth
Sensitivity of present value of loss (billions)
Cost savings passed on to consumer
15,0% 20,0% 25,0% 30,0% 35,0% 40,0% 45,0%
20,0% 0,49 0,66 0,82 0,98 1,15 1,31 1,48
JPY 25,0% 0,62 0,82 1,03 1,23 1,44 1,64 1,85
content 30,0% 0,74 0,98 1,23 1,48 1,72 1,97 2,21
per vehicle 35,0% 0,86 1,15 1,44 1,72 2,01 2,30 2,58
40,0% 0,98 1,31 1,64 1,97 2,30 2,62 2,95
8 / 14
Other Yen exposures (losses)
Corporate
Risk
Management
@ EDHEC
Exposure type $ Billions
Prof. Schroth
Competitive exposure 1,48
Commercial exposure 0,90
Affiliate investment exposure -0,82
JPY borrowing exposure -0,50
Total Yen Exposure 1,06
9 / 14
Other Yen exposures (losses)
Corporate
Risk
Management
@ EDHEC
Exposure type $ Billions
Prof. Schroth
Competitive exposure 1,48
Commercial exposure 0,90
Affiliate investment exposure -0,82
JPY borrowing exposure -0,50
Total Yen Exposure 1,06
But, can these exposures be combined?
9 / 14
Other Yen exposures (losses)
Corporate
Risk
Management
@ EDHEC
Exposure type $ Billions
Prof. Schroth
Competitive exposure 1,48
Commercial exposure 0,90
Affiliate investment exposure -0,82
JPY borrowing exposure -0,50
Total Yen Exposure 1,06
But, can these exposures be combined?
No. The competitive exposure is an estimate of the
bottomline present value effect, and not the effect on current
transactions.
9 / 14
Eq. (2) is estimated using a seemingly unrelated regression estimate for the "rms
in each country.
Using regression analysis: GM’s Yen
As Table 2 reports, the results for the U.S. portfolio show a signi"cant
exposure to both the yen and the Deutschmark with the expected negative sign
for the yen and a positive sign for the Deutschmark. This result indicates that
Exposure 19730-1996
the U.S. portfolio loses value as the yen depreciates relative to the dollar, and
gains in value as the Deutschmark depreciates relative to the dollar. At the
Corporate
Risk Table 2
Management U.S. portfolio and "rm-speci"c exchange rate exposure
@ EDHEC Regressions of the automotive industry for the total sample are shown using the following model:
"
Prof. Schroth r "!#"!R # ! ""#S #$ ,
! !! ! !
#!"
where "! is the market risk, R is the return on the country-speci"c market portfolio, "" is the
!!
currency exposure of the portfolio, #S is the change in real exchange rates, r is the monthly return,
! !
and $ is the error term. Data is taken from Datastream International and represents 276 observa-
!
tions covering 1973}1995. For the results, $ is the U.S. dollar, DM is the Deutschmark, and Y is the
Japanese yen. Heteroscedastic-consistent t-statistics are in parentheses, and ***,**, * denotes 1%,
5%, and 10% signi"cance levels, respectively. The adjusted R# shown is from the ordinary least
squares regression. Firm variation is an F-test of the di!erence in exposure across "rms.
Country-speci"c Ad jus ted
Firm Intercept market risk Y/$ DM/$ R# (%)
U.S. portfolio 0.0028 1.0588 !0.3413 0.3544 37.3
(0.741) (13.697)*** (!1.874)* (2.098)**
GM 0.0012 0.9197 !0.3335 0.5170 32.4
(0.312) (11.879)*** (!2.003)** (2.959)***
Ford 0.0044 1.0048 !0.2422 0.1400 31.2
(1.072) (9.915)*** (!1.233) (0.789)
Chrysler 0.0029 1.2495 !0.4472 0.4067 23.0
(0.464) (9.568)*** (!1.436) (1.563)
Firm variation [F-test] [0.426] [3.572]**
Source: Williamson, R., ‘Exchange rate exposure and competition: evidence from the automotive industry,’
Journal of Financial Economics 59, p.453.
10 / 14
Implied bottomline
Corporate
Risk
Management
@ EDHEC • A 1% depreciation of the yen is associated with a 0,33%
Prof. Schroth lower GM’s stock return:
→ A 20% depreciation would imply a 6,6% decline in the
share price;
On September 2001, GM’s market value was $23 billion
(=550 M shares x $42 per share);
→ GM’s market value would fall by $1.51 billion! (=$23
billion x 6,6%).
• Note that GM’s returns are negatively related to the
Yen/$ exchange rate, but positively related to the DM/$
exchange rate.
→ Can you explain why?
11 / 14
GM’s Exposure in Different Periods
Corporate Table 5
Risk Variation of U.S. portfolio and "rm-speci"c exchange rate exposure
Management Regressions of the automotive industry for the total sample and three subperiods, using the following model:
@ EDHEC "
r "!!R # ! !""S PD;M## ,
! !! ! !
R. Williamson / Journal of Financial Economics 59 (2001) 441}475
Prof. Schroth #!"
where, !! is the market risk, R is the return on the country-speci"c market portfolio, !" is the currency exposure of the portfolio, "S is the rate of change
!! !
in real exchange rates, PDUM is the dummy variable for each of the three subperiods (1973}1980, 1981}1988, and 1989}1995), r is the monthly return, and
!
# is the error term. For the results, $ is the U.S. dollar, DM is the Deutschmark, and Y is the Japanese yen. Heteroscedastic-consistent t-statistics are in
!
parentheses, and ***,**, * denotes 1%, 5%, and 10% signi"cance levels, respectively. The adjusted R# shown is from the ordinary least squares regression
with an F-test of the variation across time shown in brackets. Firm variation is an F-test of the di!erence in exposure across "rms.
First period Second period Third period Adjusted
Country- R# (%)
speci"c Y/$ DM/$ Y/$ DM/$ Y/$ DM/$ [Yen]
Firm market risk Dummy Dummy Dummy Dummy Dummy Dummy [DM]
U.S. portfolio 1.0619 !0.0393 0.0733 !0.6673 0.3138 !0.4184 0.8987 39.6
(13.584)*** (!0.165) (0.260) (!1.482) (1.063) (!1.690)* (3.017)*** [1.125]
[2.543]*
GM 0.9105 0.0918 0.0518 !0.7549 0.8363 !0.6313 0.9836 34.5
(11.365)*** (0.158) (0.204) (!2.116)** (2.742)*** (!2.113)** (2.740)*** [2.610]*
[3.816]**
Ford 1.0254 0.1935 !0.0789 !0.8481 0.3211 !0.2856 0.4894 33.6
(9.847)*** (0.647) (!0.279) (!2.207)** (0.965) (!0.927) (1.623) [2.488]*
[1.087]
Chrysler 1.2527 !0.4114 0.2518 !0.3933 !0.2148 !0.3432 1.2277 25.1
(9.483)*** (!0.999) (0.589) (!0.473) (!0.438) (!0.908) (2.836)*** [0.006]
[2.306]*
Firm variation [F-test] [1.195] [0.514] [0.396] [2.521]* [0.784] [2.878]*
463
Source: Williamson, R., ‘Exchange rate exposure and competition: evidence from the automotive industry,’
Journal of Financial Economics 59, p.453.
12 / 14
FX Exposure of Japanese Auto Firms
454 R. Williamson / Journal of Financial Economics 59 (2001) 441}475
Corporate
Table 3
Risk Japan portfolio and "rm-speci"c exchange rate exposure
Management Regressions of the automotive industry for the total sample are shown using the following model:
@ EDHEC "
r "!#"!R # ! ""#S #$ ,
! !! ! !
#!"
Prof. Schroth where, "! is the market risk, R is the return on the country-speci"c market portfolio, "" is the
!!
currency exposure of the portfolio, #S is the change in real exchange rates, r is the monthly return,
! !
and $ is the error term. Data is taken from Datastream International and represents 276 observa-
!
tions covering 1973}1995. For the results, $ is the U.S. dollar, DM is the Deutschmark, and Y is the
Japanese yen. Heteroscedastic-consistent t-statistics are in parentheses, and ***,**, * denotes 1%,
5%, and 10% signi"cance levels, respectively. The adjusted R# shown is from the ordinary least
squares regression. Firm variation is an F-test of the di!erence in exposure across "rms.
Country-speci"c Ad jus ted
Firm Intercept market risk $/Y DM/Y R# (%)
Japanese portfolio 0.0052 1.0113 !0.2196 !0.1065 44.7
(1.602) (12.945)*** (!1.423) (!0.700)
Toyota 0.0096 0.8468 !0.4068 0.0422 19.1
(1.880)* (7.343)*** (!2.363)** (0.213)
Nissan 0.0036 0.8696 !0.2487 !0.0621 28.7
(0.911) (9.767)*** (!1.736)* (!0.351)
Honda 0.0068 0.9119 !0.5234 !0.3286 21.1
(1.266) (7.184)*** (!1.817)* (!1.242)
Isuzu 0.0030 1.4249 0.0601 0.2155 29.0
(0.466) (7.561)*** (0.224) (0.770)
Mazda 0.0006 1.0104 !0.2273 !0.2421 24.6
(0.112) (8.616)*** (!1.096) (!1.122)
Suzuki 0.0086 0.8589 !0.2404 !0.0564 14.8
(1.462) (7.631)*** (!0.689) (!0.197)
Mitsubishi 0.0045 1.1389 0.0527 !0.3174 34.4
(0.981) (10.170)*** (0.279) (!1.632)
Firm variation [F-test] [1.103] [1.174]
"rm-speci"c level, the results show that most of the signi"cance of the portfolio
Source: Williamson, R., ‘Exchange rate exposure and competition: evidence from the automotive industry,’
is due to General Motors (GM). The full sample results of Ford and Chrysler
Journal of Financial Economics 59,they
show that p.453.
have insigni"cant exposure to both the yen and the Deutsch-
mark. The positive and signi"cant exposure of the portfolio to the Deutschmark
is driven by GM. 13 / 14
If one thinks of U.S. automotive producers as exporters to Germany and as
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
⇒ cheaper production costs in Japan as sales in US
tumble following a Yen depreciation. (3)
⇒ gains same cost advantage as Japanese competitors.
(3)
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
⇒ cheaper production costs in Japan as sales in US
tumble following a Yen depreciation. (3)
⇒ gains same cost advantage as Japanese competitors.
(3)
• Commercial policy: e.g., reducing US prices as a
strategic response?
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
⇒ cheaper production costs in Japan as sales in US
tumble following a Yen depreciation. (3)
⇒ gains same cost advantage as Japanese competitors.
(3)
• Commercial policy: e.g., reducing US prices as a
strategic response?
⇒ Passive response but not a hedge. (7)
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
⇒ cheaper production costs in Japan as sales in US
tumble following a Yen depreciation. (3)
⇒ gains same cost advantage as Japanese competitors.
(3)
• Commercial policy: e.g., reducing US prices as a
strategic response?
⇒ Passive response but not a hedge. (7)
• Financing policy: borrowing in yen?
14 / 14
Final words
Corporate
Risk
How should GM manage these large competitive exposures?
Management
@ EDHEC
• Forwards/futures and options:
Prof. Schroth ⇒ target transactions and not necessarily the overall
exposure of the firm’s market value. (7)
• Changes to the cost structure: e.g., producing cars in
Japan?
⇒ cheaper production costs in Japan as sales in US
tumble following a Yen depreciation. (3)
⇒ gains same cost advantage as Japanese competitors.
(3)
• Commercial policy: e.g., reducing US prices as a
strategic response?
⇒ Passive response but not a hedge. (7)
• Financing policy: borrowing in yen?
⇒ Also a feasible hedge as GM already does it. (3)
14 / 14
