Liability Management at General Motors Case Solution

Case Solution

An analyst at General Motors charged with manipulating the dwelling in the automaker's debt need to research whether and the way to alter the interest rate exposure in the firm's latest debt offering. The analyst must consider GM's liability management policy recommendations, the firm's existing interest rate exposure, his anticipation of interest levels, as well as the quantity of interest rate products available. She must decide if you should leave the fixed-rate instrument unchanged in order to initiate a swap, cap, interest rate option, or swap option transaction.

Excel Calculations

Swaptions

Swaptions 2 by 5

Annual forward ratio

6 months forward ratio

LIBOR at discount to AA

6 months LIBOR rate

Net cash flow from bonds

Fixed rate swap payments received

Premium on writing the call

Floating rate paid

NPV of cash flows

Yield Rate

Swaptions 3 by 5

Questions Covered

How will changes in interest rates affect GM’s business? Try to quantify this effect as best you can. Speculate on the various ways in which changes in interest rates influence the demand for autos, the prices the firm can charge, its input costs, etc. Apart from using derivative securities like those discussed in the case, how else could a firm like GM control its exposure to interest rates?

Evaluate each of the options that Stephane Bello faces to hedge interest rate risk. Evaluate how each of the options affects the risk of the issue.

What should be GM’s over-arching policy toward managing interest rate exposure? For example, should GM seek to neutralize the effect of interest rate changes on operating cash flow? market value of equity? or to abandon all such efforts? GM’s ability to invest in new technologies? Be prepared to discuss and interpret GM’s stated policies.

How has GM measured its exposure? How would you propose that GM measure its interest rate exposure?

How would you propose that GM reports the interest rate exposure of its business, and of its liabilities?

What role does a “rate view” play in the liability management policy at GM? What role should it play in GM’s liability management program and why?