Feldstein tells DiMaria thatGM forecast operating exposure for all its regions on a monthly basis. Then, the "riskiness" of these exposures is calculated by multiplying the net (regional) exposure by the annual volatility of the currency pier measured by a percentage. If the result is $10 million or more, then GM hedges 50% of the exposure for volatile currencies the triggering figure is $5 million). To clear DiMaria's understanding, Feldstein illustrated this with an example - GM's European region had a forecast euro exposure of $400 million and the annual volatility of the US dollar /euro exchange rate was 12%. Therefore, the implied riskiness of the exposer was $48 million ($400 million x 12%). The hedging policy requires hedging exposures with implied risks over $10 million at a 50% ratio, requiring GM to hedge $200 million of its euro exposure.

GM U.S expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the dollar value of the funds to be received is estimated at $800,000 for the euros and $500,000 for the Canadian dollars. Based on data for the last fifty months,Feldsteinestimates the standard deviation of monthly percentage changes to be 9 percent for the euro and 11 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.45.

If GM's North America region had a forecast euro exposure of $800 million, using the volatility/standard deviation calculated in question 15 andFeldstein illustration of riskiness,

Calculate the implied riskiness of the exposer of $600 million.

A. The implied riskiness of the exposer is $48 million requiring GM to hedge $200 million of its euro exposure.

B. The implied riskiness of the exposer is $50 million requiring GM to hedge $300 million of its euro exposure.

C. The implied riskiness of the exposer 1is $25 million requiring GM to hedge $600 million of its euro exposure.

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Answer To calculate the implied riskiness of the exposure for GMs North America region with a foreca... View the full answer