In the event of the above risks, Tabaczynski considers three alternative strategies with diiferent exchange levels with the price of each hedging strategy incorporated in the calculations.
• The AIFS is a company that organises educational and cultural exchange programs for students. It receives most its revenues in US-$, while the costs mostly incure in Euros and British Pounds.
• So AIFS must hedge thes currencies to protect its business model.
But AIFS faces two severe problems in their hedging activities:
What percentage of the unsure/forecasted demand should be covered and what the right instrument (options or contracts) in what proportions.
The general policy of AIFS is to cover 100 % of the forecast and match the option percentage to the perceived volume risk.
The aim was now to have a spreadsheet that models the risks better. This more comprehensive spreadsheet covers different scenarios of demand and of the exchange rate, above all it accounts the price of hedging.
• The focus of this case study lies on the American organization AIFS and its challenges in hedging foreign currency risks. More than 50,000 students participate each year in exchange programs of AIFS, which leads to annual revenues of around $ 200 million. As the catalog prices in USD have to be fixed and guaranteed more than one year before the costs in foreign currencies have to be paid, AIFS is hedging currency risks by forwards and options.
Mrs. Tabaczynski (CFO) and Mr. Archer-Lock (controller) are always in search of the best