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). [...]
[...] While hedging appears to be the best option for mitigating transaction exposure, researchers examining this process have noted that there are a plethora of hedging methods that can be used to ensure the financial success of the organization. Fong (1997) reports that there are a host of tradition tools that can be used for currency hedging. These include: currency forwards, currency options, currency futures, and currency swaps. Examining the benefits and drawbacks associated with these hedging options, Fong goes on to make the following observations: Currency Forwards: “Forward contracts, being negotiable instruments traded in the over-the-counter (OTC) market, allow flexibility with respect to the size and maturity of the contract. [...]
[...] For any company seeking entrance into the foreign market, the lessons learned in the case of General Motors can clearly provide a basis for decision-making when developing foreign subsidiaries. References Fong, H.G. (1997). Currency risk management in emerging markets. Emerging Markets Quarterly, 19-24. GM shares hit after '05 loses rises by billion. MSNBC. Accessed April at: http://www.msnbc.msn.com/id/11865286/. Griffin, J. (2006). Exchange rate exposure. Yale University. Accessed April at: [...]
[...] Conclusion Critically reviewing what has been written about the methods used by General Motors to mitigate the financial risks of operating in a multinational context, it is evident that the organization has made some positive and negative choices. Overall the methods used by the organization to mitigate both transaction and operation exposure appear to be quite salient for meeting the needs of the organization. Recent efforts to reduce transaction exposure by reducing the number of foreign currencies encountered by the organization appears to be a positive step toward improving the financial stability of the organization. [...]
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