2 GM Argentina is operating in a hyperinflationary environment In practice some

2 gm argentina is operating in a hyperinflationary

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GM Argentina is using the local currency as the functional currency. 2. GM Argentina is operating in a hyperinflationary environment In practice, some MNCs have attempted to hedge translation exposure in the forward market. Such action amounts to speculating in the forward market in the hope that a cash profit will be realized to offset the non-cash loss from translation. Success of this strategy depends on a precise prediction of future exchange rates, for such a hedge will not work over a range of possible future future spot rates. In addit ion, such a hedge will increase the tax burden, since the profit from the forward “hedge” (i.e., speculation) is taxable, but the translation loss does not reduce taxable income. Also, it is still highly controversial for a firm to expend resources and acquire hedging position with forwards and swaps to hedge accounting results. Assuming that balance sheet hedge is acceptable to GM management, GM management could either : 1. increase exposed ARS assets without simultaneously increasing ARS liabilities, or 2. reduce ARS liabilities without simultaneously reducing ARS assets.
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Page 21 ARS Monetary Assets ARS Monetary Liabilities Scrap incentive owned by government 45.80 Payables to local suppliers 24.10 Interest subsidy owned by government 3.20 Provisions to local suppliers 11.30 VAT credit and other tax owed by government 130.60 ARS loan (VAT financing) 13.70 Receivable (tax credit reimbursement) 2.70 Other provisions 9.80 Other 7.80 Tax payable 2.00 Total ARS Monetary Assets 190.10 Total ARS Monetary Liabilities 60.90 USD Monetary Assets translated to ARS using 2:1 USD Monetary Liabilities translated to ARS using 2:1 Cash 5.00 Accounts payable 449.00 Receivables 41.00 Loans 202.60 Total USD Monetary Assets 46.00 Total USD Monetary Liabilities 651.60 Total Monetary Assets 236.10 Total Monetary Liabilities 712.50 ARS net property, plant and equipment (assumption) 350.00 Stockholders' Equity (126.40) Total Assets 586.10 Total Liabilities and Equity 586.10 Net exposed liabilities in ARS 126.40 Divided by exchange rate, ARS/USD 1.00 Net exposed liabilities in USD 126.40 times amount of devaluation 200% Expected translation loss under Current Method 252.80 GM Argentina Balance Sheet (ARS currency) Conclusion : the final hedging choice by GM management will depend on the confidence of ARS exchange rate expectations, and GM management’s willingness to bear risk. The money market he dge, if feasible in Argentina market, appears the preferred alternative. Otherwise, option hedge will be the second choice.
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Page 22 3. COMPETITIVE EXPOSURE FROM JAPANESE AUTOMAKERS RESULTING FROM DEPRECIATION OF JAPANESE YEN Summary of Data Collected A 5% price increase could be expected to lower unit sales by around 10% A consequent annual impact on GM's Income Statement could then be valued as a perpetuity at a 20% discount rate Average Japanese car had between 20% and 40% Japanese content A reasonable etimate of what the Japanese automakers might give away in terms of added incentives or lower sticker prices would be between 15% and 45% of the cost savings Any market share losses to Japanese automakers would be shared equally among and entirely by the Big Three in Detroit.
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