The American Institute for Foreign Study (AIFS) is a foreign exchange program organization that provides 50,000 students the opportunity to study abroad. AIFS serve American students traveling abroad to Europe, China, Mexico, and other locations. Therefore, AIFS receive cash inflows in dollars while they pay outflows in mostly Euros and British Pounds. The organization had $200 million in annual revenues. AIFS provides two main divisions: the College division primarily for 5,000 university-aged students and the High School Travel division for chaperoned travel. Lastly, AIFS also offer several over programs such as the Au Pair and Camp America divisions.
AIFS protects itself from currency risk by hedging. The company hedges up to two years in advance because it has to be definite before AIFS completes its sales cycle. Therefore there is uncertainty of how much exchange currency the company needed. There was also the concern of how much AIFS should cover of expected cost. Currently, AIFS covered 100%. Lastly, AIFS hedges currency risks through currency forward contracts and currency options. The company wants to operate at a proportion between contracts and options that is most optimal.
AIFS guaranteed no price changes before the next catalog. Prices are determined a year in advance. There is uncertainty with hedging. If sales were lower than expected, AIFS may have too much currency and vice versa. Ultimately, the success of hedging depended on the final sales volume and the exchange rate for US dollars. Christopher Archer-Lock, London-based controller and Becky Tabaczynsk, CFO of the high school division is currently debating the use of forwards versus options because of the 100% hedging policy. There are three alternative strategies: no hedging, 100% hedging with forwards, and 100% hedging with options. AIFS also took into consideration of exchange rates of $1.22 USD/EUR, $1.01 USD/EUR, and $1.48 USD/EUR to determine what... [continues]
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