General Motors Treasury, New York

The Treasurer's Desk

CONFIDENTIAL

TO:: Treasurer
FROM:: Treasury staff
DATE:: September 2001
RE:: Three items for your signature

Three proposals are in the folders: Canada, Argentina, Japan.

Open each one, decide with the controls, then stamp, sign and file it.

When all three are signed, open the January 2002 envelope.

Ref GM-TR-CAD

CAD — Canada

TO:: Treasurer
FROM:: Doug Ostermann, FX & Commodities Manager
DATE:: September 2001
RE:: Raise the CAD hedge from 50% to 75%

Proposal: CAD hedge at 75%

Canada is our largest open currency item. Cash flow over 12 months is C$1.7B short. Pension and retiree liabilities add a net monetary liability of C$2.1B. GM Canada reports in dollars, so both reach income (Exh. 9, 10).

Policy hedges half the cash flow. At 75% the one-sigma swing in earnings falls from $0.071 to $0.061 a share. Policy caps any hedge at 75% and puts at least 25% of it in options.

Scale: CAD 10M at 1.5667 is USD 6,382,842.92, value 17 Dec. An at-the-money-forward call costs 1.45%, or $92,551.

Cost in USD of CAD 10M, by spot at expiry. Staff redraw from Exh. 9 and 10.

75% of the cash flow piece only. Of total exposure it covers 33%.Group 14

Options floor is 25% of the hedge. Slide under it and the sheet flags it.Group 14

Option beats the forward only if CAD ends above 1.5898 per dollar.Group 14

Decision sheet: CAD

Hedge ratio, % of 12-month cash flow50%

policy 50cap 75

Options share of the hedge, %25%

floor 25

EPS swing, 1σ movepolicy baseline: $0.071
Share of total CAD exposure hedged: 22%
Cheaper at spot 1.5780forward vs option, per CAD 10M: –
Your mix vs no hedgeat spot 1.5780, per CAD 10M: –

Ref GM-TR-ARS

ARS — Argentina

TO:: Treasurer
FROM:: Mercedes Michel, Domestic Finance dealing desk, New York
DATE:: September 2001
RE:: Pricing for a peso hedge ahead of a likely devaluation

Proposal: peso hedge pricing

The peso is pegged 1:1. Argentine debt is 45% of GDP and $16.5B falls due in 2002. Ratings sit six to seven notches below investment grade. Our Latin America staff put default at 40% short term and 50% medium term.

Forward prices by tenor are attached (Exh. 13). The Argentine books carry a $302.7M net dollar liability, a $151M reported charge at 2:1 (Exh. 11). The peso position that really loses value is $129.1M, a $65M loss in dollars. GM Argentina has already moved its peso cash to the European Regional Treasury Center in dollars.

Exhibit 13 prices, applied to a 2:1 devaluation. $ millions, staff redraw.

Reported hit $151M, economic loss $65M. Two different bills.Group 14

$101M of the loans are in dollars. Refinance them, no forward needed.Group 14

VAT credit of ARS 130.6M is a peso asset. Net it before sizing.Group 14

Decision sheet: ARS

Hedge notional, $M$0M

Tenor of the forward

Odds of devaluation40%

Hedge cost if the peg holds3 months: $0.0M
Payoff at 2:1: $0.0M
Expected valueat 40% odds: $0.0M
Position vs economic loss: –

Ref GM-TR-JPY

JPY — Japan

TO:: File
FROM:: The Treasurer (own question)
DATE:: September 2001
RE:: Yen: is there anything to hedge?

Open question: a yen hedge

Nobody proposed this. Japanese makers sold 4.1M units in the US. A one-yen move shifts their combined profit by more than $400M. They lose money below ¥110 per dollar and profit at ¥120 and up.

GM has no yen transaction behind this. The exposure is competitive: a weaker yen lets them cut prices. GM paid $1,969 a unit in incentives in 2000 against $1,593 for the industry (Exh. 16).

On the books GM is short about $2.2B of yen: $900M payables, $500M bonds, $818M share of affiliates' debt. Stakes in Fuji, Isuzu and Suzuki sit on the other side (Exh. 15). A yen hedge sets a precedent for the euro and the German makers.

Staff estimate of the profit GM loses to a 20% weaker yen, one step at a time (Exh. 15, 16).

Long yen?! The 50% payable hedge works against the natural hedge.Group 14

Low to high is 6x. $0.48B to $2.87B. Pick a size, any size.Group 14

A 12-month hedge on a forever exposure. Roll it every year.Group 14

Decision sheet: JPY

Hedge size, $B of yen forwards$0.0B

Case for the lost profit

GM keeps its 50% hedge on the $900M yen payables

PV of lost profitmid case: $1.44B
Natural hedge gainshort-yen positions: $0.29B
Your hedge coversof this case's PV: 0%

Ref GM-TR-2002

OPENED JANUARY 2002

What the three signatures bought. Rates in the Argentina section are illustrative.

Argentina

The peg was dropped in January 2002 and the peso fell well past 2:1 within months. Pick a rate to test your hedge.

illustrative

Canada

Japan

CARBON COPY: Treasury file, three items

The test: deviate from the passive policy only when the hedge cuts economic risk at a known, low cost.

Signed, The Treasurer. Filed September 2001.