Aifs Currency Hedging Solution

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AIFS Case

Finance in a Global Environment
Rochester Institute of Technology

Group 4

Mengjie Ban
Liu Gu
Danielle Sherwood
Bill Speight
Mohamed Waheed

Summary

The American Institute for Foreign Study, also known as AIFS, is a student exchange organization that specializes in academic and cultural exchange programs for both college and high school students. The AIFS was founded by Sir Cyril Taylor in 1964, in the United States, and is split into two divisions: the Study Abroad College division, based in London, and the High School Travel Division, based in Boston. Christopher Archer-Lock and Becky Tabaczynski, are the controller and CFO for the college and high school divisions, respectively.

Approximately 50,000 students travel per year with AIFS, and the company currently has annual revenues nearing 200 million dollars. Both the college and high school divisions are focused on American students studying abroad. Europe and Australia are two common destinations shared by the divisions. The college division also travels to Russia and South Africa while the high school division travels to the Americas, China and Africa. The AIFS is also associated with other divisions including the Au Pair, Camp America, and Academic Year in America divisions, which conversely to their regular divisions, place non-American students in the United States.

The two divisions, both college and high school, are susceptible of reacting to world news and events close to their travel dates. However, the high school travelers are most likely to react to worldwide news. Some of these events in the past that have affected AIFS revenues include the 1986 terrorist attacks, the 1991 Gulf War, the 2001 September 11 attacks and the 2003 Iraq War.

Since AIFS is predominantly working with American students traveling abroad, there are different types of financial risk that affect their potential for profit from providing these services to the students. AIFS’ revenues are primarily deposited in US dollars, while the costs are typically incurred in Euros and GBP, or British Pounds. This discrepancy between revenue and expense currencies is known as a currency mismatch.

AIFS distributes catalogs with travel destinations and pricing for students semiannually and annually for the college and high school divisions, respectively. The high school division also distributes a few small catalogs throughout the year in addition to the annual catalog. AIFS guarantees that the prices won’t increase before the distribution of a second catalog. Drastic increases or changes in the prices are frowned upon by AIFS since 70% of their clientele from the high school division are returning customers; they do not want to risk losing their customer base to a competitor because of a price increase.

In order to put together a suitable catalog for the college division with appropriate pricing, the AIFS marketing and operations managers put together a sales forecast including what they predict to be important events that may affect the sales of the coming catalog year. This forecast is done well over a year in advance, since the two catalogs that are distributed are finalized the summer before the first summer catalog for the year is to be distributed.

The high school catalog is geared towards student travelers who have not traveled abroad before. Because of this, the programs highlighted in the catalogs contain all inclusive packages from the airfare to the hotels to the tour guides. This makes the packages nearly endless in scope, so the catalog typically has over 35,000 different pricing packages. The pricing strategy for these types of packages is to increase the prices steadily from year to year. By raising the prices in small increments, the high school division is able to keep its client base of which nearly 70% of their customers are returning customers. Those returning customers are typically teachers and academic advisors who bring new...
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