General Motors, Jpy-Usd Exposure
Daniel Pinga
AEM 4290
General Motors, JPY-USD Exposure
Executive Summary
General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import market. As the yen depreciates against the dollar, Japanese automakers production cost structure reduces; this allows for lower sticker prices, added per-vehicle incentives, and the ability for Japanese firms to eat away at GM’s current revenue-generation from the United States.
By using a projected 20% devaluation of the yen, and given unit sales figures and industry elasticity, the competitive exposure of GM to the real JPY-USD spot exchange rate is roughly $1.6b. This base case is established as the most likely scenario, yet sensitivity analysis of varying percentages of JPY content per-vehicle and cost-savings distribution to consumers showcase a much wider range of potential exposure values. When summing this competitive exposure with the remaining exposures (commercial, affiliate, and borrowing), I find that GM has an overall $1.2b exposure to the yen globally. Further, I suggest an alternate, less information-intensive means for calculating a similar figure, which includes regression of GM returns to market returns, then finding an exposure coefficient to JPY-USD fluctuations; this helps to show how returns of the firm are correlated specifically to their yen exposure. While direct calculations are not performed, this method
AEM 4290
General Motors, JPY-USD Exposure
Executive Summary
General Motors Corporation, the world’s largest automaker, has an extensive global outreach, which places the firm in competition with automakers worldwide, and subjects itself to significant exchange rate exposure. In particular, despite most of its revenues and production being derived from North America, depreciating yen rates pose problems for the firm indirectly through economic exposure. While GM possesses ‘passive’ hedging strategies for balance sheet and income statement exposures, management has not yet quantified or recognized solutions to possible losses from the indirect competitive exposure it now shared with Japanese automakers in the U.S import market. As the yen depreciates against the dollar, Japanese automakers production cost structure reduces; this allows for lower sticker prices, added per-vehicle incentives, and the ability for Japanese firms to eat away at GM’s current revenue-generation from the United States.
By using a projected 20% devaluation of the yen, and given unit sales figures and industry elasticity, the competitive exposure of GM to the real JPY-USD spot exchange rate is roughly $1.6b. This base case is established as the most likely scenario, yet sensitivity analysis of varying percentages of JPY content per-vehicle and cost-savings distribution to consumers showcase a much wider range of potential exposure values. When summing this competitive exposure with the remaining exposures (commercial, affiliate, and borrowing), I find that GM has an overall $1.2b exposure to the yen globally. Further, I suggest an alternate, less information-intensive means for calculating a similar figure, which includes regression of GM returns to market returns, then finding an exposure coefficient to JPY-USD fluctuations; this helps to show how returns of the firm are correlated specifically to their yen exposure. While direct calculations are not performed, this method