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Task 4 Task 4 is related to our next case Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures

For Part A, assume you work for a consulting firm and your project manager has asked you to address the following questions. Your short memo should be of professional quality. 1. Why is GM worried about the USD/JPY exchange rate?

2. Using the data in the case, what impact would a 20% depreciation of the JPY have on the value of GM? Follow the steps Feldstein outlines on page 3 of the case. Make assumptions where necessary. Notice that you can infer GMs margin from Exhibit 6 and the information on page 4. Assume that there is no operational reaction and that th impact persists forever. Use the posted Excel file as a guideline. You are free to modify the Excel sheet as you wish. Copy and paste your numbers from the Excel sheet into your response. Make sure to provide a discussion of what you have found as well as of critical assumptions you have made in your solution.

3. How could GM manage its exposure to the JPY? Discuss operational (i.e. natural hedges) as well as financial hedges that GM could implement. I will collect Part A at the beginning of class.

Part B For Part B, please see the posted Excel file. We will discuss Part B in class. You do not have to hand in Part B. But I expect that you have worked on it before class.

Your written case solution for Part A (at most three pages, including the Appendix) should look something like this: Task 4 A Prepared by: Name 1, Name 2, Name 3 We have analyzed the exposure of General Motors to the JPY/USD exchange rate. In our memo, we address the following questions:

Question 1 xxxx

Question 2 See detailed calculation in Appenix 1.


Question 3 xxxx

Appendix 1 Detailed Calculations for Question 2

Step 1: Step 2: a) b)

Assume the JPY depreciates by 20% relative to the USD How will this impact the costs of the average Japanese car sold in the US? How much (in %) is the Japanese content of the average Japanese car? How much (in %) do total USD costs drop if the Japanese content costs 20% less? How much (in %) of this cost reduction would Japanese car makers pass on to US customers, through added incentives or added sticker prices? Effectively, Japanese car makers would reduce the sales price of their cars by how much (in %)?

Step 3:

Step 4:

What is the additional sales volume Japanese car makers will capture due to this price reduction? What is the direct sales elasticity? Sales Elastiticy is the ratio of %-change in volume over %-change in price


b) c)

What is the % change in volume given Step 3 and Step 4 a)? What would this mean in terms of units (ie cars)? How many more cars would Japanese car makers sell due to the 20% JPY depreciation? (in number of cars) How many fewer cars would GM sell? (in number of cars) What is the impact on GM's profit / cash flow? What is GM's average margin (in USD) per cars? One way to estimate the average margin per car is to look at Exh. 6 and to realize that GM's incentives are (see page 4) about 1/3 of the total margin per car.

Step 5: Step 6: a)


How much lower is the total margin (in USD) for GM it it loses market share to its Japanese competitors? What would be the impact of GM's market value (in USD) if the loss under 6 a) persisited forever? Simply use the standard formula to value a perpetual cash flow. Use the discount rate suggested in the case.

Step 7:

Step 8

If GM's market value is USD 23 billion, how much value (in % of market value) is lost due to a 20% depreciation of the JPY?