Currency Hedging at Aifs
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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 it incurs costs in other currencies mainly in Euros (EUR) and Pounds (GBP). * AIFS hedged its future cost commitments up to 2 years in advance. The problem was that the hedge had to be put in place before AIFS had completed its sales cycle, and before it knew exactly how much foreign currency it needed. * A key feature was that AIFS guaranteed that its prices would not change before the next catalog, even if world events altered AIFS’ cost base. * According to AIFS’s hedging policies, it has to predict the exchange rate fluctuation, the number of customers, which may be different with the final exchange rate and the volume when selling currencies, so the currency exposure happens. The actions of AIFS’s competitors may make AIFS less competitive resulting in minimum sales of the currencies bought, further resulting in currency exposure. So the bottom-line risk, the volume risk and the competitive pricing risk will give rise to the currency exposure at AIFS.
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Q2. What would happen if Archer-Lock and Tabaczynski did not hedge at all?
* AIFS organizes educational and cultural exchange programs throughout the world. * It has two major divisions: The Study Abroad College and the High School Travel division. Both are managed by Archer-Lock & Tabaczynski respectively. * AIFS receives most of its currencies in American dollars (USD but it incurs
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 it incurs costs in other currencies mainly in Euros (EUR) and Pounds (GBP). * AIFS hedged its future cost commitments up to 2 years in advance. The problem was that the hedge had to be put in place before AIFS had completed its sales cycle, and before it knew exactly how much foreign currency it needed. * A key feature was that AIFS guaranteed that its prices would not change before the next catalog, even if world events altered AIFS’ cost base. * According to AIFS’s hedging policies, it has to predict the exchange rate fluctuation, the number of customers, which may be different with the final exchange rate and the volume when selling currencies, so the currency exposure happens. The actions of AIFS’s competitors may make AIFS less competitive resulting in minimum sales of the currencies bought, further resulting in currency exposure. So the bottom-line risk, the volume risk and the competitive pricing risk will give rise to the currency exposure at AIFS.
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Q2. What would happen if Archer-Lock and Tabaczynski did not hedge at all?
* AIFS organizes educational and cultural exchange programs throughout the world. * It has two major divisions: The Study Abroad College and the High School Travel division. Both are managed by Archer-Lock & Tabaczynski respectively. * AIFS receives most of its currencies in American dollars (USD but it incurs