Hedging Currency Risks At AIFS Essay example

Submitted By jasonchan219
Words: 755
Pages: 4
Open Document
Case Synopsis
Setting:
Early July 2004
Christopher Archer-Lock (London-based controller, AIFS)
Becky Tabaczynski (CFO, high school travel division, Boston)
American Institute for Foreign Study (AIFS)
Organized educational and cultural exchange programs throughout the world
College
Credit course
American University-aged student
Higher Margins/ low Volume operations
High School Travel
American Council for International Studies (ACIS)
1 to 4 weeks
Low margin/High Volume operation
Other programs
Au Pair Division
Industry
Students
Academic and cultural exchange programs world wide
Revenues in American Dollars (USD)
Cost Primarily Euros (EUR) and British Pounds (GBP)
Study Abroad College division (Archer-Lock, controller and treasurer)
Sent college-age students to universities worldwide for semester-long programs
Competitive Advantage
“catalog-based”
Guaranteed prices
Primary customer base attractive to steady prices
Pricing:
College
Prices set by June 30
High School
Increase year over year
Analysis of Issues
What Percentage of the expected costs should they cover?
What proportions should AIFS use forward contracts and options?
Depends on
Final sales volume
Market Value of USD
Currency Exposure
Transaction exposure
The transaction exposure also known as a short-term economic exposure is a risk which results due to contracts subjected to foreign exchange exposures in which company has already entered. A transaction exposure can be on buy side or sell side of a business transaction for a company.
Economic exposure
Economic exposure has a long-term effect of the transaction exposure. A company is believed to have an economic exposure if it is constantly affected by inescapable exposure to foreign exchange over the long-term. These exposures to foreign exchange are integral to the company and affects its profitability over the years and therefore results in an influence on the market value of the company as a risk.
Currency conversion exposure
Conversion exposure is accounting natured and is known as balance sheet exposure or accounting exposure. It relates to restatement, conversion or translation of the financial statements resulting in gain or loss of a subsidiary located in another country.
Comments on solution or strategies
i. Currency Accounts and Currency Loans:
As a simple hedging tool, currency accounts (bank accounts set up in a foreign currency) work well for companies with a regular flow of both money out (payments) and (money in (receipts) in a particular foreign currency. The matched in- and out-flows help the company avoid having to buy or sell currency for each transaction. Currency loans (borrowing money in a foreign currency) work similarly, in that the company can use future income streams in that currency to pay off the loan. 
 ii. Spot Trading
Trading on the spot market is the most common foreign exchange transaction. The company simply converts foreign currency at today's market foreign exchange rate. Spot transactions are most commonly used for immediate payments in a foreign currency. 

iii.
Show More

Related Documents: Hedging Currency Risks At AIFS Essay example

Hedging Currency Risk at Aifs Essay

Summary AIFS is an American based company that offers travel abroad and exchange study services to both college and high school students. While AIFS’s revenues are denominated in American Dollars (USD), most of their costs are in foreign currencies as Euros (EUR) and British Pounds (GBP). Consequently, foreign exchange hedging has a crucial importance for the company because it provides protection against different types of risk that derive from its activity. In order to reduce risk, the company…

Words 2617 - Pages 11

Currency Hedging at Aifs Essay

Q1. What gives rise to the currency exposure at AIFS? * Currency exposure is the extent to which the future cash flows of an enterprise, arising from domestic and foreign currency denominated transactions involving assets and liabilities, and generating revenues and expenses, are susceptible to variations in foreign currency exchange rates. * AIFS organizes educational and cultural exchange programs throughout the world. AIFS receives most of its currencies in American dollars (USD but…

Words 1633 - Pages 7