Aspen Technology, Inc. Currency Hedging Review
Executive Summary
Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that Aspen hedge completely its exposure but after “natural hedging”, which we recommend increasing thanks to the larger financial capacities allowed by its IPO. Using options for aggregated positions (by estimating yearly sales per currency),rather than having multiple forwards contracts, seems reasonable becauseit would enable the company to benefit from good moves in the currency exchange rates, to pay less in transaction costs because of the larger amounts and at the same time use its current human resources (limited hedging skills) by avoiding complex, expensive products.
Business and Marketing Strategy
Aspen Tech’s business strategy and marketing strategy create financing needs due to the position Aspen puts itself in with its customers. Aspen allows installment payments that hurt the company’s cash flows and in turn require financing to generate enough cash flow to pay for Aspen’s annual expenses. This business model causes Aspen to expose itself to foreign exchange risk because many of those account receivables are with foreign firms. In this way, Aspen has both accounting risk exposure and cash flow risk exposure.
The accounting risk exposure occurs because these account receivables may not be worth as much USD when
Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that Aspen hedge completely its exposure but after “natural hedging”, which we recommend increasing thanks to the larger financial capacities allowed by its IPO. Using options for aggregated positions (by estimating yearly sales per currency),rather than having multiple forwards contracts, seems reasonable becauseit would enable the company to benefit from good moves in the currency exchange rates, to pay less in transaction costs because of the larger amounts and at the same time use its current human resources (limited hedging skills) by avoiding complex, expensive products.
Business and Marketing Strategy
Aspen Tech’s business strategy and marketing strategy create financing needs due to the position Aspen puts itself in with its customers. Aspen allows installment payments that hurt the company’s cash flows and in turn require financing to generate enough cash flow to pay for Aspen’s annual expenses. This business model causes Aspen to expose itself to foreign exchange risk because many of those account receivables are with foreign firms. In this way, Aspen has both accounting risk exposure and cash flow risk exposure.
The accounting risk exposure occurs because these account receivables may not be worth as much USD when