Hedging Currency Risks At AIFS

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PLEKHANOV RUSSIAN ECONOMIC UNIVERSITY
INTERNATIONAL FINANCIAL MANAGEMENT

Case Study REPORT
Hedging Currency Risks
At AIFS

Professor:
Yulia Y.Finogenova

Performed by:
Budeanu Diana
Gabaydullin Ilnar Kulikova Ekaterina Malev Mikhail
Content:

Introduction and problem statement…………….

Identification of major risk factors:
Risk assessment.......................................................... Map of risks.......................................................... SWOT..........................................................

Hedging Scenarios:
1. Should AIFS hedge at all?.......................................................... 2. Proportions of the expected costs that should be covered….. 3. Proportions of forwards and options use……………………..

Introduction and problem statement

The American Institute of Foreign Studies (AIFS) is a company that organizes student exchange programs worldwide with two main divisions. The College Division arranges academic years and semesters or summer schools. The High School Division organizes 1-4 week educational travels for students and teachers. More than 50,000 students participate each year in exchange programs of AIFS, which leads to annual revenues of around $ 200 million. AIFS receives most of its revenues in US-Dollars, whereas most of its costs incur in foreign currencies, mainly in Euros and British Pounds. This is why they use currency hedging in order to protect their bottom line and to deal with the following risks: - Changes in exchange rates could increase the cost base. - They buy foreign currency based on a projected sales volume, because they don´t know the final sales volume in advance. - AIFS has a price guarantee set up in a catalog for one year, which means that they cannot transfer rate changes into the price. AIFS’ Management is always in search of the best solution for hedging these 3 main risks. Therefore Mr. Archer-Lock developed a two-by-two matrix, which includes 4 different business cases depending on the proportion of the two key factors for successful hedging – sales volume and exchange rate. Based on this matrix Mrs. Tabaczynski developed a spreadsheet in order to decide what percentage of the expected requirements should be covered and what should be the proportion of forwards and options. The spreadsheet compares different potential sales volumes and three different exchange rates for the US-Dollar. Now the company has to analyze these examples in order to find the best mix to reduce its risks. The model of Mrs. Tabaczynski will help in evaluating the risk of the different strategies and in making a decision.

Two Major Divisions:

College Devision:
- Volume of 5,000 American university aged students

- Low volume- High margin operations

- Countries with study programs in Australia, France , Italy, UK, South Africa etc. High School Travel Devision:
- American Council for International Studies; 20,000 participants

- High volume- Low margin operations

- Organized 1-4 weeks educational trips to Europe, China, Mexico

- All Costs Inclusive Offer: airfare, transportation, hotel, guide etc.

Catalogs-Based Business:

High School Travel Devision:

• One main Fall catalog with several smaller ones.

College Devision:

• Two main catalogs per year (one Summer and one Fall/Spring)

• As a key feature, AIFS guaranteed that its prices would not change before its next catalog, even if world events altered its cost base.

Pricing Strategy:

College Pricing...
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