BUS

115 - FINANCIAL MANAGEMENT: CASE 8

Abrias, Mhark Ian C.
Andres, Norma Lowela E.
Gatchalian, Lerissa G.
Pagaspas, Paul Ryan S.
Yabut, Kristelle Alexis A.
______________________________________________________________________________

Questions:

1. What is the magnitude of the Foreign Exchange exposure for each of the currencies in
Exhibit 1? (Please see answers below.)

EXHIBIT 1

ESTIMATED ANNUAL CURRENCY FLOWS ($ MILLIONS) 1994

COUNTRY GROSS BUYS GROSS SALES NET EXPOSURE
GERMANY $ 5,845.00 $ 2,400.00 $ 3,445.00
UK $ 440.00 $ 2,245.00 $ (1,805.00)
SPAIN $ 1,395.00 $ 1,340.00 $ 55.00
FRANCE $ 380.00 $ 920.00 $ (540.00)
HOLLAND $ 55.00 $ 750.00 $ (695.00)
BELGUIM $ 705.00 $ 560.00 $ 145.00
ITALY $ 180.00 $ 530.00 $ (350.00)
AUSTRIA $ 485.00 $ 465.00 $ 20.00
SWEDEN $ - $ 255.00 $ (255.00)
US $ 255.00 $ 140.00 $ 115.00
JAPAN $ 455.00 $ - $ 455.00
AUSTRALIA $ 195.00 $ - $ 195.00
OTHER $ - $ 785.00 $ (785.00)

$ 10,390.00 $ 10,390.00 $ -

The net magnitude of foreign currency exposure is calculated by getting the difference
between gross buy and net sales.

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 2. Does the exposure to the German mark help or hinder the competitive performance of
General Motors?

As a multinational automobile company, the management of exposure is a key decision
of a company that will gain competitive advantage over its major competitors in
different countries.

The German mark is a strong currency nowadays. Therefore, the competitiveness of
domestic producers in European countries is not as vigorous when contrasted with the
position of producers that are situated in weak currency countries. This is because of the
high costs confronted by manufacturers which can give General Motors as a non-
domestic company resulting price advantages. In the comparison to the strong
performance of the German Mark, General Motors has tended toward broadening its
assembly locations so as to profit by lower wage levels and weaker currency nations. At
this point, if the mark devalued against the US dollar but appreciated against the Euro, it
will be difficult to state that exposure to the Mark just had negative impacts. It then may
hinder the competitive performance of GM through including transaction exposure and
translation exposure.

3. How would the parent company in Detroit view the situation if the gross buys and
gross sales in Germany were reversed?

General Motor’s main business is operated in Germany. If the situation of the gross buys
and gross sales in Germany were reversed, there will be a significant effect on General
Motor’s profit levels as a result of currency exposure. It is a fact that the cost of material
and labour is comparatively higher in Germany but its profit return will be higher as
well. Because of its diversified suppliers in weaker currency countries, the value of
investment in Germany might influence its parent company to agree to use its revenues
in Germany to balance its exposure in the weaker currency countries.

4. The data in the case address the currency flows for GM- Europe that are tracked by the
Regional Treasury Center in Brussels. However, another issue involves the stock of
assets that the firm has in Europe. Speculate on what you think might be happening to
the value on GM's investment in Europe in the light of various currency appreciations
and depreciation, especially the German Mark.
The value of assets will increase while the value of liabilities will decrease when hard
currencies such as the German Mark are likely to appreciate. When the home currency
appreciates, GM should avoid receiving payment from suppliers but instead adopt a
policy of using forward contracts

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 GM in this case received a range of tax benefits in Belgium. This provides a competitive
advantage in terms of investment in Belgium which allows the company to respond to
depreciation and appreciation events more effectively in balancing its investments
across Europe.

If the German Mark appreciates, GM should continue to move its assembly and
component sourcing operations overseas to take advantage of the lower cost countries
and reducing their costs in Germany. GM could retain their assembly operations in
Germany since the German assembly plant is more competitive if the German Mark
depreciates. This will allow General Motors to have a better return on investment.

5. What techniques and financial instruments might the RTC employ to control its
currency exposure? Explain these techniques in light of the French currency situation?
GM might employ operational techniques such as Geographic diversification.

The call option is one which might be quite appropriate, valuable risk management tool
to GM’s situation in France because by considering a call option on the foreign currency
they will able to purchase at a maximum dollar price together with forward contracts in
order to hedge the exposure to foreign currency. They should also consider Option and
Forward Contracts or borrowing or investing in local markets.

Option Contracts is paying a fee for the option to purchase (call option) or sell (put
option) a foreign currency at an agreed rate in the future. Forward contract is locking in
a rate today for a future date.

6. What financial benefits, if any, does General Motors have from locating its treasury
function in Belgium? What benefits, if any, accrue to Belgium?
Locating the treasury function in Belgium will allow GM to not only allow them to
centralize the treasury decision but also to act in coordination with treasury matters. In
addition, an offer to provide tax benefits to Multinational Corporation was proposed by
the company in Belgium. With this, it would give the company’s treasury function
advantages such as tax benefits and investment opportunities in the country.

7. What parties, if any, might be harmed by the existence of regional treasury function
like GM’s?
The strategy of GM, which is to locate their production areas in weaker currency
countries, will allow them to incur lower wage costs. The company’s inclination on

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 outsourcing as part of the strategic decision will lower the business’ operating costs but
will cause damage on those countries labor market. However, looking at the long run,
labor markets in weaker currency countries may result to a lower quality of product
since low-skilled workers will be employed by the local government to meet the
requirement of the company.

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