Hedging Currency Risks at Aif
ACFI 703
March 27, 2013
Hedging Currency Risks at AIF
The American Institute of Foreign Studies (AIFS) is a company that organizes student exchange programs worldwide with two main divisions. The College Division arranges academic years and semesters or summer schools. The High School Division organizes 1-4 week educational travels for students and teachers. More than 50,000 students participate each year in exchange programs of AIFS, which leads to annual revenues of around $ 200 million. AIFS receives most of its revenues in US-Dollars, whereas most of its costs incur in foreign currencies, mainly in Euros and British Pounds. This is why they use currency hedging in order to protect their bottom line.
The college division had higher margins than the low margin/high volume operations of the ACIS division. Since their customers are really responsive to the world events including the safety issues while abroad, their sales volume can drop up to 60% on such events (news of war). It will also affects the currency exchange rate due to Political instability. For instance, their sales came in below their projections due to such event, and if they were locked into surplus forward contracts, they will lose money. On the other hand, if their sales volume came in higher than expected, they need more currency to cover. But the currency rate moved in the money, so they have to buy at a higher rate than the rate they used when they priced the catalog. Either, it could hurt their revenues. (aka Bottom line risk and sales volume risk)
The alternative option is to bill customers in euros by including a currency adjustment clause in its contracts. Currency exchange rate fluctuates everyday depends on a series of events and data backing up. It will make the deal sounds less appealing, because their customers are really loyal to them based on "no price surprise" strategy. And if the US dollar become stronger against the euro along the way, the customers are actually paying
March 27, 2013
Hedging Currency Risks at AIF
The American Institute of Foreign Studies (AIFS) is a company that organizes student exchange programs worldwide with two main divisions. The College Division arranges academic years and semesters or summer schools. The High School Division organizes 1-4 week educational travels for students and teachers. More than 50,000 students participate each year in exchange programs of AIFS, which leads to annual revenues of around $ 200 million. AIFS receives most of its revenues in US-Dollars, whereas most of its costs incur in foreign currencies, mainly in Euros and British Pounds. This is why they use currency hedging in order to protect their bottom line.
The college division had higher margins than the low margin/high volume operations of the ACIS division. Since their customers are really responsive to the world events including the safety issues while abroad, their sales volume can drop up to 60% on such events (news of war). It will also affects the currency exchange rate due to Political instability. For instance, their sales came in below their projections due to such event, and if they were locked into surplus forward contracts, they will lose money. On the other hand, if their sales volume came in higher than expected, they need more currency to cover. But the currency rate moved in the money, so they have to buy at a higher rate than the rate they used when they priced the catalog. Either, it could hurt their revenues. (aka Bottom line risk and sales volume risk)
The alternative option is to bill customers in euros by including a currency adjustment clause in its contracts. Currency exchange rate fluctuates everyday depends on a series of events and data backing up. It will make the deal sounds less appealing, because their customers are really loyal to them based on "no price surprise" strategy. And if the US dollar become stronger against the euro along the way, the customers are actually paying