Aspen Case Study
MULTINATIONAL FINANCIAL MANAGEMENT
Groupe 5
Case study
ASPEN TECHNOLOGY INC.: Currency Hedging Review
1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?
The main exchange rates exposures are: British pounds, Deutsch Mark, Japanese Yen and Belgian Francs.
Aspen faces foreign currency risks due to sales and expenses in those foreign currencies. Expenses include R&D costs (20% of overall R&D are in UK), headquarters, sell force etc. and represent 52% of Aspen expenses.
If Aspen sells its products in local currency, it’s because its clients need to plan their P&L and don’t want to see their expenses fluctuate with the currency change.
Besides, Aspen grants deferred payment for 5 years, impacting heavily their working capital. They can afford to grant 5 years receivable because their clients are highly rated multinational, which cannot cancel the payment (that carry a huge financing spread) and the market’s demand is inelastic. The market is looking for high quality product: with two years development needed to get a customized software, the switching costs is very high and benefits to Aspen (90% of its clients re-conduct their contracts).
However, Aspen succeed to finance its need by selling its receivables to two financial institutions - guarantying a hedge to the currency - depending on the nature of the receivable (where it comes from, the amount etc.).
Aspen hedge all its receivable and do not use any natural hedge (compensating expenses and sells in a local currency).
We also have to point out that the currencies have a high volatility, without being correlated, which benefits to Aspen (they diversify their risks!).
2) Calculate Aspen’s exposures by currency for the past year. What currencies is it long and short? (Based on Exhibit 5)
CURRENCY
Sales (in k$)
Operating Expenses (in k$)
Net exposure (k$)
Long/Short
£
5.865
4.771
1094
LONG
Groupe 5
Case study
ASPEN TECHNOLOGY INC.: Currency Hedging Review
1) What are Aspen Technology’s main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need?
The main exchange rates exposures are: British pounds, Deutsch Mark, Japanese Yen and Belgian Francs.
Aspen faces foreign currency risks due to sales and expenses in those foreign currencies. Expenses include R&D costs (20% of overall R&D are in UK), headquarters, sell force etc. and represent 52% of Aspen expenses.
If Aspen sells its products in local currency, it’s because its clients need to plan their P&L and don’t want to see their expenses fluctuate with the currency change.
Besides, Aspen grants deferred payment for 5 years, impacting heavily their working capital. They can afford to grant 5 years receivable because their clients are highly rated multinational, which cannot cancel the payment (that carry a huge financing spread) and the market’s demand is inelastic. The market is looking for high quality product: with two years development needed to get a customized software, the switching costs is very high and benefits to Aspen (90% of its clients re-conduct their contracts).
However, Aspen succeed to finance its need by selling its receivables to two financial institutions - guarantying a hedge to the currency - depending on the nature of the receivable (where it comes from, the amount etc.).
Aspen hedge all its receivable and do not use any natural hedge (compensating expenses and sells in a local currency).
We also have to point out that the currencies have a high volatility, without being correlated, which benefits to Aspen (they diversify their risks!).
2) Calculate Aspen’s exposures by currency for the past year. What currencies is it long and short? (Based on Exhibit 5)
CURRENCY
Sales (in k$)
Operating Expenses (in k$)
Net exposure (k$)
Long/Short
£
5.865
4.771
1094
LONG