Option contracts on the other hand give AIFS much more flexibility. If they future spot rate is lower than the option strike price‚ AIFS can cancel their option and buy Euros at the lower rate. AIFS must still pay the option premium though‚ currently 5% of the USD amount hedged. Unfortunately for AIFS their profit margin is only around 5%‚ so hedging completely with options could wipe out any profit. We chose the 75%/25% forward/option mix because it provides us with the lowest cost assuming
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Session 4 CASE Questions Innocents Abroad: Currencies and International Stock Returns The goal of this case is to help Sandra Meyer develop a presentation to address Henry Bosse’s concerns about international investments. The general idea is to demonstrate to Henry the benefits of international diversification‚ if any. To achieve this goal‚ you need to have a view on 1) the impact of foreign exchange (FX) rates on the return and risk of international investments‚ and 2) the impact of having
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• This case shows us the problems faced by AIFS due to the fact that it receives most of its revenues in US-Dollars but with its costs incurred in foreign currencies (Euros and Pounds). AIFS uses currency hedging to protect their bottom line and to cope with changes in exchange rates which can increase cost base and also purchase foreign currency based on projected sales volume because they don’t know what future sales volume will be. In the event of the above risks‚ Tabaczynski considers three
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AFM 322 Case Study Preparation Hedging Currency Risk at AIFS The case summary is due on by 11:30am on June 2‚ 2015. You are encouraged to discuss the case in groups‚ however‚ each student must submit their own summary via Learn prior to the due date. Only electronic submissions will be accepted. The submission should not exceed 4 pages‚ 12 point‚ Times New Roman font‚ double spaced‚ 2.54 cm margins on a letter size page. 1. Case synopsis (35 points) Summarize the setting of the case and describe
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How does AIFS make money? Aifs is long in dollars and short in Euro’s. (has dollar revenues and euro costs) What happens when the dollar appreciates/depreciates? What is the currency risk? Why can’t they just pass-through to their customers? For simplicity in calculations: Focus on the $/€. Ignore the time value of the investment in the option premium. Analysis Provide background to the case: what the company does‚ how it sets prices‚ why they don’t pass-through exchange rate
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Hedging Currency Risks at AIFS 1. The final sales volume and the final dollar exchange rate gives rise to the currency exposure risk. Prices are set 1 year ahead of time so any fluctuation in the exchange rate will potentially cause a loss or savings to AIFS when the currency is exchanged. 2. If the exchange rate remains constant at $1.22/euros then AIFS will not incur a loss or a gain. It would cost $1220 per participant at this exchange rate. If actual dollar costs were above this
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currency exposure at AIFS? 2. What would happen if Archer-Lock and Tabaczynski did not hedge at all? 3. What would happen with a 100% hedge with forwards? A 100% hedge with options? Use the forecast final sales volume of 25‚000 and analyze the possible outcomes relative to the ‘zero impact’ scenario described in the case. complete the spreadsheet.. 4. What happens if sales volumes are lower or higher than expected as outlined at the end of the case? 5. What hedging decision would
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emotional arousal.’ (p. 154) n ’Nonverbal theorist Dale Leathers (1990) reports on research demonstrating that‚ compared to verbal cues‚ non-verbal cues are four times as effective in their impact on interpersonal impressions.’ (p. 137) 2. Identify the hedging expressions in the follow ing sentences. 1. There is no difficulty in explaining how a structure such as an eye or a feather contributes to survival and reproduction; the difficulty is in thinking of a series of steps by which it could have arisen
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convertibility of the rupee. Currently forwards‚ swaps and options are available in India and the use of foreign currency derivatives is permitted for hedging purposes only. This study aims to provide a perspective on managing the risk that firm’s face due to fluctuating exchange rates. It investigates the prudence in investing resources towards the purpose of hedging and then introduces the tools for risk management. These are then applied in the Indian context. The motivation of this study came from
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What is GM’s foreign exchange hedging policy? GM’s foreign exchange hedging policy has three primary objectives. Its first objective is to reduce cash flow and earnings volatility. Specifically‚ management hedges the company’s transaction exposures and consciously ignores any balance sheet exposures (translation exposures). Second‚ GM aims to minimize the management time and costs dedicated to global FX management. The company employs a passive FX management strategy since an internal study
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