Hedging Currency Risks at AIFS
AFM 322
Hedging Currency Risk at AIFS
1.
Case Synopsis
Christopher Archer-Lock and Becky Tabaczynski both work for American Institute for
Foreign Study (“AIFS”). Archer-Lock is the controller of AIFS and Tabaczynski is the CFO of
AIFS’s high school travel division ACIS.
AIFS a student exchange organization that organizes educational and cultural exchange programs throughout the world. Founded in the U.S. in 1964, AIFS has annual revenues of close to $200 million and sent more than 50,000 students on their programs each year. AIFS has two major divisions, the Study Abroad College division, which sends college-age students to universities worldwide for semester-long programs, and the High School Travel division, which organizes one to four week trips for high school students and their teachers. The College division had higher margins than the High School division. As well, the High School division was effected heavily by world events. Negative events would drop sales dramatically.
AIFS is a catalogue-based company. They would send catalogues to colleges twice a year and to high schools once a year with smaller catalogues sent throughout the year. A key aspect of the catalogues is that AIFS guarantees its prices would not change until the next catalogue. Their customer base was loyal to AIFS because there were no surprises when it came to prices.
Due to the international nature of this business, AIFS was exposed to huge currency risks.
They receive its revenues in USD but incur its costs in other currencies, mainly Euros (EUR) and
Pounds (GBP). Since exchange rates are constantly fluctuating, AIFS’s costs remain uncertain.
However, the prices they charge are fixed because, as discussed above, they would always guarantee their prices in their catalogues.
To try and sure up these costs, AIFS is hedges the exchange rate. Their hedging policy is to cover 100% of their projected costs. AIFS worked with six banks to purchase their currency.
The banks all granted AIFS
Hedging Currency Risk at AIFS
1.
Case Synopsis
Christopher Archer-Lock and Becky Tabaczynski both work for American Institute for
Foreign Study (“AIFS”). Archer-Lock is the controller of AIFS and Tabaczynski is the CFO of
AIFS’s high school travel division ACIS.
AIFS a student exchange organization that organizes educational and cultural exchange programs throughout the world. Founded in the U.S. in 1964, AIFS has annual revenues of close to $200 million and sent more than 50,000 students on their programs each year. AIFS has two major divisions, the Study Abroad College division, which sends college-age students to universities worldwide for semester-long programs, and the High School Travel division, which organizes one to four week trips for high school students and their teachers. The College division had higher margins than the High School division. As well, the High School division was effected heavily by world events. Negative events would drop sales dramatically.
AIFS is a catalogue-based company. They would send catalogues to colleges twice a year and to high schools once a year with smaller catalogues sent throughout the year. A key aspect of the catalogues is that AIFS guarantees its prices would not change until the next catalogue. Their customer base was loyal to AIFS because there were no surprises when it came to prices.
Due to the international nature of this business, AIFS was exposed to huge currency risks.
They receive its revenues in USD but incur its costs in other currencies, mainly Euros (EUR) and
Pounds (GBP). Since exchange rates are constantly fluctuating, AIFS’s costs remain uncertain.
However, the prices they charge are fixed because, as discussed above, they would always guarantee their prices in their catalogues.
To try and sure up these costs, AIFS is hedges the exchange rate. Their hedging policy is to cover 100% of their projected costs. AIFS worked with six banks to purchase their currency.
The banks all granted AIFS