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Critical review of the methods used by GM to mitigate against risks in a multinational context

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  1. Introduction
  2. Managing Financial Risk
  3. Transaction Exposure
    1. Currency Forwards
    2. Currency Options
    3. Currency Swaps
  4. Operating Exposure
  5. Translation Exposure
  6. Conclusion

General Motors (GM) is one of the 10 largest multinational corporations in the world. Although the organization has enjoyed a considerable amount of success in a multination organization, the reality is that the company has had to take a number of steps to ensure its financial security in the foreign market. Overall, General Motors faces a wide range of threats that could significantly impede the development of the organization. These threats include: transaction exposure, operating exposure and translation exposure. Given that each of these threats could notably impact the ability of the organization to be financially successful, this investigation considers a review of these threats and the specific methods that are currently being utilized to mitigate these threats. Through a careful consideration of what has been written on these issues, a more integral understanding of the financial challenges facing multinational corporations will be elucidated.

[...] With these issues examined, it will then be possible to consider the particular methods used by General Motors to mitigate this type of exposure. Among the most notable methods used by automobile organizations to lower operation exposure is the selection of plant locations. In most cases, auto manufacturers will locate plants in countries that have historically low labor costs and stable political environments. ?Ford Motor Co., General Motors and Honda have all established substantial production in Mexico, where labor is cheap and high quality. [...]

[...] At the present time, Leone (2005) reports that GM uses a combination of these methods in order to successfully mitigate foreign exchange exposure. However, Leone does note that in recent years, GM has made attempts to reduce the amount of hedging it undertakes. According to this author, when GM first entered the foreign market, it sought to hedge 100 percent of its foreign currency options. Today, the organization hedges about 50 percent of its foreign currency and works with only three foreign currencies: the dollar (short), the yen (long), and the pound sterling (long). [...]

[...] At the present time, General Motors employs the temporal method to protect the organization against the risks associated with translation exposure (Klein, 2004) With the realization that the General Motors organization utilizes the temporal method for hedging translation exposure, it is helpful to consider the basic context of this method and the specific differences that exist between this method and the current rate method. Defining the temporal method of hedging, researchers observe that: Under the temporal rate method, the objective is to measure each subsidiary transaction as though the transaction had been made by the parent. [...]

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