Impact of exchange rates on automobile sector
Management,
We received your request to research the impact of the exchange rates on the automotive sector and we are writing this memo to help you understand the matter both from the point of view of literature evidence and the real scenario of how exchange rates have affected General Motors.
Beginning with the literature evidence, we found a plethora of research work conducted for studying the impact of exchange rate of the automotive sector, however, one of the most recent work was conducted in 2013 as part of which researchers analyzed the impact of exchange rate volatility on the stock returns of the companies serving in the automobile industry. The researchers found that for companies like Renault, Peugot and Audi, the exchange rate movement does not have any effect on the stock returns of these companies. On the contrary, for BMW the results were opposite as the stock returns of these companies were found to be strongly affected because of exchange rate movements. Following the observation, the researchers concluded that the impact of exchange rate movements on the automobile companies largely depends as how the companies manage their risk exposure and performance of derivative instruments purchased by them to counter exchange rate risk. Another research paper published in 2005 analyzed the impact of exchange rate volatility on the automobile industry in US and found that while exchange rate volatility may lead to a greater volume of trades, however, the volatility negatively affects the profit margins of the parent company.
In order to analyze the impact of exchange rate on an automobile company, we chose General Motors, one of the world’s largest automobile company. Since the company has operations around the globe and has manufacturing facilities in 37 countries, it was inevitable for it to ignore the exchange rate risk. Analyzing the annual report of the company we found that the company uses multiple derivative instruments such as currency forwards, swaps and options to hedge its exchange rate risk in respect to forecasted revenues, costs and commitments dominated in foreign currency. By the end of 2015, the company owed net value liability worth $0.8 billion on derivative financial instruments. However, the hedging strategies did not turn profitable and foreign exchange translation loss of $302 million was recorded during the year compared to $19 million for the previous year. The loss resulting from exchange rate volatility, eroded $9.3 billion from the revenue figures and had the exchange rate held constant, the revenue figures would have surged by $5.8 billion compared to revenue figures of 2014. Accordingly, Henceforth, on the basis of the outcome of research papers and witnessing the impact of exchange rate volatility on General Motors, we can assert that while cross-border operations do result in more trade volume, however, if the hedging strategies are not prudent, the volatility of the exchange rates can adversely affect the financial condition of the multinational automobile makers.
We hope that a brief discussion about the impact of exchange rate volatility on the automotive sector will help you in understanding the subject matter and accessing the importance of risk management in a company’s operations, and the combined efforts of the management and the executives of the risk department will result in the formation of prudent risk management strategies.
Regards,
Risk Department
Works Cited
Avsar, Kemal Turkcan and Veysel. "Exchange Rate Volatility and U.S. Auto-Industry Exports:A Panel Cointegration Approach." International Journal of Economics and Financial Issues (2013): 772-787.
General Motors. "Annual Report 2015." Annual Report. 2015.
—. GM Reports Record Net Income of $9.7 Billion and Record EBIT-Adjusted of $10.8 Billion for 2015. 3 February 2016. 27 February 2016 <https://www.gm.com/investors/earnings-releases.html>.
Rao, Lyna Alami Barumwete and Feiyi. "Exchange rate risk in Automobile Industry:An Empirical Study on Swedish, French, and German Multinational Companies." Research Paper. 2003.
