Hmba Essay

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Case 3 – Foreign Exchange Trading Strategies at General Motors Due June 11 Questions: 1. What is the principal difference between transactional and translational exposures? Why do you think GM’s policy is to hedge part of transactional exposures but to generally not hedge translational exposures? The rest of the questions refer to transactional exposure only. Please disregard the translational exposure. 2. Create a graph of gain/loss (relative to the current exchange rate) to GM in $US as a function of fluctuation in Canadian dollar for a range of 3-month-ahead spot rates ranging from 1.40 to 1.80 if the transactional exposure of $CAD 1,682M remains unhedged. 3. a. Assume that GM decides to hedge its 50% of CAD transactional exposure of $CAD 1,682M using a three-month forward contract. On the graph in 2), add a graph of the resulting gain/loss due to a combination of the underlying transactional exposure to CAD and gains/losses due to the forward contract. b. Assume now that GM decides to hedge 75% of its CAD exposure using a three-month forward. Add a graph of the resulting exposure to CAD. c. Assume now that GM decides to hedge 100% of its CAD exposure using a three-month forward. Add a graph of the resulting exposure to CAD. 4. d. Assume now that GM decides to hedge 50% of its transactional exposure using three-month call options on CAD with the expiration price of 1.5667. Add a graph of the resulting exposure to CAD. e. Assume now that GM decides to hedge 75% of its transactional exposure using three-month call options on CAD. Add a graph of the resulting exposure to CAD. f. Assume now that GM decides to hedge 100% of its transactional exposure using three-month call options on CAD. Add a graph of the resulting exposure to CAD. 5. What are the exchange rates at which GM breaks even under the
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