HEDGING CURRENCY RISK AT AIFS
AIFS organizes academic and cultural 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 prices once they are published in catalogs. Please
answer the following
questions regarding AIFS’s currency exposure. Please type your answer
and be as precise as
you can.
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 100% hedge with forwards? A 100% hedge with options?
Use the forecast ?nal 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 hedge decision would you advocate?
