Building financial relationship
Foreign Exchange Hedging Strategy at General Motors
General Motors being the world’s biggest automaker accrued a unit sale of 8.5 million motors in addition to 15.1% in market share in the year 2001. Its operations resulted to an increase in major currency risks while the treasury was able to control the risks. The main of the strategy is to limit the cash flow and incomes instability; limit the management time and costs provided to the financial management and bring into line the financial management so as to it to be stable. These are part of the hedging policies.
The hedging strategy used by the company involved reducing the management time used on the financial management, a result of an internal study which resolute that investment of the resources in the active management did result workability of the benchmarks (Desai & VEBLEN, MARCH 31 , 2006). The hedging policy additionally desired an introduction to foreign exchange so as to be controlled regionally hence leading to a constant trend with the business.
The hedging policy for GM was to acquire half of the major foreign exchange exposure accruing from the cash flows related to the operated business. The policy also composes facilities applied in hedging procedures. Forward contracts were applied to hedge the exposure resulting in the six month period and options resulting in the 7-12 months. These procedures had to be accepted by the top offices. Certain hedging policies were however not applied due to the lack of analytic methods to enumerate the exposures.
Cash Flow Hedging Strategy at the Coca Cola Company
The Coca Cola Company is a company which is based in America with branches all over the world. It is mainly concerned with the processing of beverages known as ‘Coke’. The Company is a one stock that reserves diversity and is an international platform for acquiring revenue. Coca Cola applied the hedging strategy so as to limit the variability of the cash flows of the assets or liabilities that resulted from either variation in the foreign currency exchange rate or interest rates. The Company conserves a foreign currency cash flow hedging program so as to limit the risk the dollar acquires from the sale to other countries and the cash going outside due to procurement operations are to be affected by the transformations in the foreign currency exchange rates (Stock, 2012). The company is involved in forward contracts and buying foreign currency options and collars to apply the hedging policy on certain sections of presented cash flows denominated in the currencies.
The company has been involved in product future contracts among other instrument on other commodities to control the price risk related to the presented purchases of products applied in the processing. The derivative facility have been acquired and used as component of the Coca Cola commodity cash flow hedging program. The main aim of the program is to limit the inconsistency of the cash flows related to the forth coming buying of products. Risk is managed so as to interest the rate variations by applying derivative financial tools. There is no remaining derivative instrument in the hedging program.
Comparison of the foreign exchange and cash flow hedging Strategies
The hedging strategies applied by General Motors and the Coca Cola Company shows the need to reduce the cash flows which is varying. In the General Motors, the hedging desires to limit the cash flow as well as the income instability this is set to be done by limiting the time used in management and costs involved in the financial management, with the intention to make it stable. While in the Coca Cola hedging strategy, the company aims to reduce the cash flow of its assets or liabilities that accrue from the changing foreign exchange or interest rate.
The two companies are involved in forward contracts. While in the General Motors it was applied to hedge exposure in Coca Cola company it bought foreign currencies so as to use the hedging policy on some areas of the cash flows.
The two companies experienced risks which they are consequently able to control. In the General Motors, it was involved in operations that lead to an increase in massive currency risks. This however managed by the treasury. In the Coca Cola Company, it maintained its foreign currency cash flow hedging program with the intention to reduce the risk relating to the US dollar through selling to other external countries. Another method used involved using product future contracts as well as other tools on products so as to manage the risk connected to the purchases used in processing. The risk is hence managed with the desire to interest the rate which is changing through the use of derivative financial tools.
The business that I would definitely like to be associated with is the Coca Cola Company. The company has an extensive plan while applying the hedging process. The risks inflicted to the company are monitored in both the long term as well as the short term. This creates a good platform for doing business considering that it is inconstant watch. The Company monitors the short and long term debt. It controls the risk it may suffer so as to interest the rate variations by applying the derivative financial tools. In the General Motors mode of controlling risks is quite vague as well as the method used to identify it. The management of the risk by the treasury does not offer a more extensive method of handling. In addition to this, the method of noting or monitoring this is not available.
Conclusion
The mode of hedging policy applied by the General Motors did not involve any clear mode of managing the risk experienced by the company; the company hence composed no guidelines on controlling the competitive exposures. The Coca Cola Company on the other hand is a good example of how a hedging policy is handled (Bofah, 2012). The clear mode of monitoring and controlling the risks and the limitation of the cash flows is extensive and proves to be quite successful.
Bibliography
Bofah, K. (2012). Foreign Currency Hedging Strategies.
Desai, M. A., & VEBLEN, M. F. (MARCH 3, 2 0 0 6). Foreign Exchange Hedging Strategies at General Motors: Competitive Exposures. Harvard Business School.
Stock. (2012). Cash Flow Hedging Strategy. Coca Cola Company (KO).
