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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 addition, 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.
Page 21ARS Monetary AssetsARS Monetary LiabilitiesScrap incentive owned by government45.80Payables to local suppliers24.10Interest subsidy owned by government3.20Provisions to local suppliers11.30VAT credit and other tax owed by government130.60ARS loan (VAT financing)13.70Receivable (tax credit reimbursement)2.70Other provisions9.80Other7.80Tax payable2.00Total ARS Monetary Assets190.10Total ARS Monetary Liabilities60.90USD Monetary Assets translated to ARS using 2:1USD Monetary Liabilities translated to ARS using 2:1Cash5.00Accounts payable449.00Receivables41.00Loans202.60Total USD Monetary Assets46.00Total USD Monetary Liabilities651.60Total Monetary Assets236.10Total Monetary Liabilities712.50ARS net property, plant and equipment (assumption)350.00Stockholders' Equity(126.40)Total Assets586.10Total Liabilities and Equity586.10Net exposed liabilities in ARS126.40Divided by exchange rate, ARS/USD1.00Net exposed liabilities in USD126.40times amount of devaluation200%Expected translation loss under Current Method252.80GM 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 hedge, if feasible in Argentina market, appears the preferred alternative. Otherwise, option hedge will be the second choice.
Page 223. COMPETITIVE EXPOSURE FROM JAPANESE AUTOMAKERS RESULTING FROM DEPRECIATION OF JAPANESE YEN Summary of Data CollectedA 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 rateAverage Japanese car had between 20% and 40% Japanese contentA 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 savingsAny market share losses to Japanese automakers would be shared equally among and entirely by the Big Three in Detroit.