•This case shows all of us the problems faced by AIFS due to the fact that this receives almost all of its profits in US-Dollars but with its costs sustained in foreign currencies (Euros and Pounds). AIFS uses money hedging to guard their important thing and to cope with changes in exchange rates which can increase cost foundation and also buy foreign currency based upon projected revenue volume since they don't know what foreseeable future sales volume level will be. In the event of the above risks, Tabaczynski looks at three substitute strategies with diiferent exchange levels while using price of each and every hedging approach incorporated inside the calculations.
•The AIFS is a company that organises educational and cultural exchange programs for individuals. It gets most the revenues in US-$, as the costs mainly incure in Euros and British Pounds.
•So AIFS must hedge thes currencies to protect their business model.
But AIFS looks two extreme problems within their hedging activities: What percentage of the unsure/forecasted demand must be covered and what the proper instrument (options or contracts) in what ratios.
The general plan of AIFS is to cover 100 % of the outlook and match the option percentage to the identified volume risk.
The aim was now to have a schedule that versions the risks better. This even more comprehensive schedule covers different scenarios of demand associated with the exchange rate, above all it accounts the price of hedging.
•The concentrate of the this case study lies within the American firm AIFS as well as challenges in hedging money risks. A lot more than 50, 1000 students take part each year in exchange programs of AIFS, leading to total annual revenues of around $ 250 million. Because the listing prices in USD have to be fixed and guaranteed more than one year prior to the costs in foreign currencies must be paid, AIFS is hedging currency risks by ahead and options.
Mrs. Tabaczynski (CFO) and Mr. Archer-Lock (controller) are in search of the very best solution for hedging the 3 main dangers of the group: - risk of increase of cost base by simply adverse change in exchange rates - risks in projected versus actual sales quantity
- risk in competitive pricing due to AIFS's assure of fixed prices, which usually excludes the possibility of transferring rate changes into price improves Therefore Mister. Archer-Lock designed a two-by-two matrix, including 4 distinct business instances depending on the amount of the two key factors for successful hedging – sales quantity and exchange rate. Based on this matrix Mrs. Tabaczynski set up a spreadsheet to calculate diverse hedging approaches and discover their consequences by variant of the hedge ratio (e. g. 0 %, twenty-five percent, … hedge in ahead; 100%, seventy five %, … hedge in options, zero hedge) and different exchange charge scenarios. The model of Mrs. Tabaczynski can help in analyzing the risk of different strategies in addition to making a decision. •The corresponding example decribes the challenges intended for the AIFS – a US company specialized upon college and high school exchange programs intended for travelling in foreign countries – of hedging currency risks because of their catalog based business model. AIFS with its total annual group yield of around $200 thousands is a well-known and founded competitor in the markets with a high customer loyality that is not at least generated by way of a promise of fixed rates. As the company has to program their Buck catalog prices more than one 12 months in advance even though the costs for the students sustained mainly in foreign currencies (mostly EUR and GBP) about one year afterwards the company previously uses forwards and choices to hedge these risks, but there are still other unforeseeable threats by simply international or perhaps economical problems influencing product sales and revenue.
The two liable persons, Mister. Archer-Lock (London based control mechanism of AIFS) and Mrs. Tabaczynski (CFO of AIFS in Boston), were constantly concerned...