Do 4 and 5.

1. (3 points) Mr. Feldstein is concerned about GMs foreign exchange exposure. In particular he is focused on operating exposure. Why is he not as concerned with the other two (transaction and translation exposure)? Does his standpoint make sense? Why?

2. (3 points) Consider the following three exposures mentioned in the case:

(i) A yen commercial exposure based on forecasted receivables less payables of $900 million

(ii) An investment exposure resulting from equity stakes in several Japanese companies

(iii) A financing exposure through a yen-denominated bond issue resulting in $500 million worth of outstanding yen-denominated bonds

For (i)-(iii), what type of exposures are these? Explain. How are (i)-(iii) affected by movements in the exchange rate? If the exchange rate moves from 117 Yen/USD to 111 Yen/USD, how do the exposures in (i)-(iii) affect GM?

3. (2 points) Consider Exhibit 6 in the case. GMs incentives are on average $1,969 per vehicle. What does this say about GMs competitive position relatively to its Japanese competitors?

4 (4 points) The average Japanese car has between 20-40% Japanese content. This is because a significant number of the Japanese cars marketed in the US were also produced at plants in the US. How does reducing the amount of Japanese content affect the foreign exchange rate exposure of the Japanese car makers? How does it affect the operating exposure of GM to movements in the yen/dollar exchange rate? Explain.

5. (5 points) How much is a 20% devaluation of the yen likely to affect GMs yearly profits? How much would this affect GMs market value? Assume any loss in profits perpetual. Hint: It can be helpful to work through the seven steps that Mr. Feldstein lays out in the paragraph starting with Feldstein felt a compelling case