Foreign Exchange Hedging Strategies at General Motors Essay

2797 Words Nov 3rd, 2012 12 Pages
FX Hedging:10 Common Pitfalls

A Structured Approach to Financial Risk Management

Executive Summary

1 Unclear Risk Management Objectives

3 Absence of Appropriate Performance Benchmarks

The design and implementation of an effective FX risk management

In order to design an effective FX hedging strategy, it is

With almost any business activity, performance

necessary to know exactly what the strategy is intended

measurement is essential to determine the effectiveness

to accomplish. While this may appear to be self-evident,

of a chosen strategy. If a company’s marketing department

volatility experienced in the foreign exchange markets over the past

the process of determining a company’s FX hedging
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Less structure and discipline in the FX hedging process

Clearly, such an approach is dangerous, and ignoring the

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Lack of transparency when communicating the hedging

relationship between the hedge and the underlying

strategy to key stakeholders

exposure, can lead to poor risk management decision-making.

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9. Confusing the Currency of Denomination with the Currency of Determination

Continuity risk in the event of staff changes or absences

10. Ignoring Cash Flow Implications

A Structured Approach to Financial Risk Management

GREY PANTONE 432C

4 Allowing a “Market View” to Drive Strategic

5 Use of Complex Derivatives as Hedging Instruments

6 Inefficient Pricing of Hedging Instruments

Undoubtedly one of biggest and most dangerous pitfalls

It used to be that ensuring a fair price on a hedging transaction

The solution lies in minimizing the bank’s information

As Neils Bohr, the Nobel-prize winning physicist, once wisely

associated with FX hedging is the use of inappropriate

involved little more than obtaining two or three competitive

advantage as much as possible, which involves:

pointed out: “prediction is very difficult, especially

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