Hedging Currency Risks at AIFS_teaching note.pdf - Hedging Currency Risks at AIFS AIFS organizes academic and culture exchanges for students sending

Hedging Currency Risks at AIFS_teaching note.pdf - Hedging...

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Hedging Currency Risks at AIFS AIFS organizes academic and culture exchanges for students, sending over 50,000 American students abroad each year for study programs and tours. Revenues are largely in U.S. dollars while costs are largely in euros. AIFS sets prices for the programs months in advance and guarantees its price once they are published in its catalogue. Every year, Controller Christopher Archer-Lock and CFO Becky Tabaczynski must decide whether to hedge a euro-dollar exposure before they know the magnitude of the exposure. They have to make hedging decisions well before the company knows about how many students will sign up for their programs, although currency fluctuations and international crises can have a severe impact on the sales volume. Learning Objectives: This case provides an introduction to how currency mismatches create exposure, why companies hedge those exposures and how they hedge those exposures 1.Identify the sources of exposures to exchange rate fluctuations and why companies choose to manage these risks 2.Consider the use of different instruments in hedging foreign exchange exposure 3.Evaluate different hedging strategies in the presence of volume uncertainty 4.Consider what outcomes should be hedged against Assignment questions: 1.What gives rise to the 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. 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 you advocate? How to approach the case? Step 1: Understand the AIFS business Please read the first 2 pages of the case. While you are reading, think about the following questions… 1)How does AIFS make money? 2)What are the company’s largest divisions? How do these two divisions differ across various parameters, such as sales cycle, customer risk tolerance, sales volume/margin, and customer decision maker?
College High School Risk tolerance Higher Sales cycle June/July Volume/margin Low/High Decision maker Student/family (I will let you fill out the column for high school) 3)

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