Aspen Technology, Inc: Currency Hedging Review HBS

Topics: United States dollar, Currency, Income statement Pages: 6 (2395 words) Published: October 6, 2008
Aspen is a software company which was established in 1982. The company mainly provides simulation solutions to process manufacturing companies. The main industry which the company focuses on is chemical processing. The entire idea began with the project of Advanced System for Process Engineering in MIT in 1976. This project was than acquired by Lawrence Evans whom founded Aspen. In a very short amount of time Aspen became a major player in the simulation part of the software industry. The company started off as a privately owned firm but in 1995 turned into a publicly traded company with a capitalization of 200 million dollars. The leading product of Aspen is Aspen Plus; we have to note that 48 % of sales were stemming from this product in 1995. The company gives great significance to R&D as the customers commitment depends on the development of Aspen’s current products. In 1995, 11.4 million dollars was dedicated to R&D. There is a factor of foreign currency expense as 20% of the total R&D expense was denominated in British pounds; the rest was in U.S dollars. Aspen enjoys a collection of committed and loyal customers; we can come to this from the increase of the licensing fees between the periods of 1988 and 1995. There were three increases in those periods at the rates of 10 percent. It is also crucial to note that 90 % of Aspen’s customers renewed their licensing agreements. Aspen attained 34 % of revenues from license renewals. An additional 34 percent was gathered from providing further services to current customers. The company has sales offices in UK, Hong Kong, Japan and Brussels. There is a joint venture operation with China’s national petroleum and petrochemical company. Aspens European operation headquarters is located in Belgium. Aspen’s general sale policy is built upon non-cancelable contracts which last three to five years. The annual cost of a license for a single US user is between $10,000 to $25,000 dollars. The company’s policy of offering three to five years contracts enables options of financing to customers. Aspen’s interest rates for the last year are between 9.5 % and 11%. The rate of interest in 1995 was 12%. Aspen generated revenue from UK which was denominated in pounds, in Japan sales were in yen, in Germany the revenue was denominated in marks. This information is essential as we are going to observe the currencies to properly grasp the risk exposure stemming from foreign currency exchange. Aspen’s financing plan to customers created a problem for the company; in 1995, the revenue was $57.5 million and the received cash from customers was $38.5 million. As we can comprehend the company’s receivable account regarding installments soared however the company faced a cash flow problem. Aspen sold cash receivables to GE Capital and Sanwa Bank for cash. Foreign denominated contracts attained dollars immediately however dollar denominated contracts were discounted based on the treasury rate. Let us take note of this as for the contracts that are not sold right after agreement, Aspen will bore risk as the interest of the contract stemming from the finance institutions will not be passed to the customer. It is crucial to point out that Aspen uses hedging for foreign exchange receivables however expenditures denominated in foreign currency is not hedged. This is the current portrait of the company, let us observe the exposures. The Risk Exposures of Aspen: The foremost risk exposure of Aspen stems from the financing cycle of the company. The company’s offered deferment plan which consists periods of three to five years triggers the company to have low cash flows. The installment receivable account however is high because most of the customers prefer the deferment plan. Aspen to finance its cash cycle therefore sell the receivables for cash, this has risks since the accounts that are not sold at the spot of the agreement could create losses due to alternating US treasury rates (if...
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