CASE ANALYSIS REPORT
HEDGING CURRENCY RISKS AT AIFS
Prof. Vinay Chiraniya
Case Report on HEDGING CURRENCY RISKS AT AIFS
The American Institute for Foreign Studies (AIFS) organizes educational and cultural exchanges program throughout the world, with major divisions like the Study Abroad College and the High School Travel. The firm's revenues are mainly in U.S. dollars, but most of its costs are in Euro dollars and British pounds. Archer-Lock (London-based controller for schoolchild exchange) and Becky Tabaczynski (CFO of groups high school travel division)at AIFS used currency hedging to manage three types of risk for AIFS:
* Bottom-line risk
* Volume risk
* Competitive pricing risk
In order to reduce risk, the company is using two hedging instruments: forward contracts and put options to sell dollars. Currency hedging policy addressed two main issues which are: how much to hedge, and in what proportions of forwards versus options.
The case is analysed under three scenarios
* No hedging
* 100% hedge with forwards
* 100% hedge with options
AIFS calculated its average cost per participant as 1000 Euro. And projected volume of participants is taken as 25000,thus total cost reach to 25 million EuroThe three scenarios are analysed at three different exchange rate levels for the dollar to Euro. They are:
* Stable dollar (1.22 USD/EURO)
* Strong dollar (1.01 USD/EURO)
* Weak dollar (1.48 USD/EURO)
Questions and Answers based on case
1. What gives rise to the currency exposure at AIFS?
Currency exposure risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged
There are several factors that give rise to currency exposure at...