Case Solution 2. This contract is no more expansive but has limited flexibility as compared to the options contracts. If the current market price crosses the strike price agreed in contact, then the contract buyer can use the option of right to call, which means that the contract seller will be responsible to fulfill the contract by selling agreed currency on the strike price. However,it would be expensive to the company.
|Published (Last):||11 April 2016|
|PDF File Size:||19.64 Mb|
|ePub File Size:||15.99 Mb|
|Price:||Free* [*Free Regsitration Required]|
That means, with the current spot rate of 1. Comparing the results of the table shows the advantages and disadvantages of each strategy. In the case of a strong dollar 1. In total the costs still sink by 3,, because the effect of the lower spot rate compensates the premium. Using only forward contracts to hedge results into no impact on the costs in any case since the exchange rate is fixed no matter what happens and there is no initial cost entering the contract.
The impact on the cost if nothing is hedged arises merely from the difference in the spot rate and is much stronger than in the hedged case.
Since the company is highly affected by news of war, terrorism and political instability, events which are impossible to predict, I would suggest to alter their hedging policy and use mainly options for hedging. Options instead would give the company more flexibility, which is a major issue since not only the exchange rates fluctuate but also the volume of participants. In this way AIFS would fix the costs for a quarter of their exposure and still be flexible enough to react to different market circumstances and unforeseen events.
In addition the company should continue to deal with 6 different banks to reduce the counterpart risk. In the following table the impact on the costs in different scenarios are summarized using the same methodology as in the table above. Instead of derivatives, an alternative possibility for AIFS to hedge their currency exposure would be to set up accounts abroad in foreign currency up to a certain amount.
This would simplify the hedging approach and it would be reasonable the business model of AIFS forces them to keep foreign exchange every year. Cite this page.
Hedging Currency at AIFS Essay
Major HBR cases concerns on a whole industry, a whole organization or some part of organization; profitable or non-profitable organizations. To make a detailed case analysis, student should follow these steps: STEP 1: Reading Up Harvard Case Study Method Guide: Case study method guide is provided to students which determine the aspects of problem needed to be considered while analyzing a case study. It is very important to have a thorough reading and understanding of guidelines provided. However, poor guide reading will lead to misunderstanding of case and failure of analyses.
Hedging Currency Risks at AIFS
AIFS sends more than 50, students each year on academic and cultural programs worldwide. AIFS always have currency risk because all the trips are out of the country for educational and cultural programs throughout the world. AIFS has a great feature that it publishes its catalog yearly and guarantees that its prices will not change before the next catalog. Operational Divisions The collegedivision organizes to send university students during the academic year, or in the summer study programs. Courses in the program comprise ofacademic credit with most students traveling to countries with study programs like Europe and other parts of the world i. On the other hand,High School Travel division, which is known as Council for International Studies ACIS , organizes trips for High School students and teachers for understanding non-native culture of different parts of the world. Hedging at AIFS Christopher Archer-Lock isthe controller and treasurer of foreigncollege divisionwhereas,Becky Tabaczynski is the CFO of High School travel division; both counterparts have a daily discussion on the phone to hedge the currency risks associated with the exchanges rates.
Hedging Currency Risks at AIFS. Case Study Help - Case Solution & Analysis
What gives rise to the currency exposure at AIFS. Get Your Custom Essay on Hedging Currency at AIFS Get custom paper Currency exposure or currency risk is the type of risk that an individual or a company faces due to the fluctuation in price of one currency against another. For AIFS —a student exchange organization that offers education and travel programs all over the world- the fact that they do business domestically and internationally gives rise to several factors that exposes them to currency risk. Their business operations give way to another factor that accentuates their currency exposure. This policy states that regardless of how the currencies fluctuate, positively or negatively, the company cannot modify their current catalogue prices. What would happen if Archer-Lock and Tabaczynski did not hedge?