Hedging Currency Risk Of AIS 1 Final

Topics: United States dollar, Exchange rate, Forward contract, Currency, Futures contract, Derivative / Pages: 8 (2980 words) / Published: Apr 17th, 2015
PLEKHANOV RUSSIAN UNIVERSITY OF ECONOMICS
INTERNATIONAL BUSINESS SCHOOL

Case Study
HEDGING CURRENCY RISKS at AIFS

Risk Management

Master’s Degree Students:
Bostandzhyan Kristina
Inarkaeva Lamara
Kirpichnikova Mariya
Starovoytov Stanislav
Sysoev Alexander

Supervisor: Yulia Finogeeva

Moscow
2015

INTRODUCTION AND PROBLEM STATEMENT
AIFS is an American based company which was found in the U.S. in 1964. There are two main divisions in the company: the College division, which offers study abroad programs for American college students and High School travel, which organizes educational travel abroad to high school students.
AIFS receives the main part of its revenue in American Dollars (USD), but because of the type of its activity, most of its expenditures are in other currencies such as Euros (EUR) and British Pounds (GBP).
AIFS pricing for the College division is based on the academic planning year, from July 1 to June 30. Therefore, for this division hedging begins in early July. The pricing for High School travel division is based on a calendar year basis from January to December and hedging take place throughout the year. Also, AIFS guarantees that prices would not change before the next catalogue would be sent out, which provides the company customer loyalty.
AIFS uses currency hedging in order to manage three types of risks which the company faces during their performance: bottom line risk, volume risk and competitive price risk.
Bottom line risk is connected with the possibility of exchange rate fluctuations. The company’s prices are fixed in USD currency, and if for example pound appreciates against dollar, the company will face losses.
Volume risk occurs because the sales are projected in advance, and the real sales can differ from the projected ones. This risk mainly has a certain attitude towards High School travel division, since its customers reacts immediately to the world cataclysms, currency exchange fluctuations, wars etc.

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