Hedging Currency Risk at AIFS
The American Institute for Foreign Studies (AIFS) organizes study abroad programs and cultural Exchanges for American students. The firm's revenues are mainly in U.S. dollars, but most of its costs are in Eurodollars and British pounds. The company’s controllers review the hedging
Activities of AIFS. AIFS has a hedging policy, but the controllers want to review the percentage Of exposure that is covered and the use of forward contracts and options. AIFS sets guaranteed Prices for its exchanges and tours a year in advance, before its final sales figures are known. The Controllers need to ensure that the company adequately hedges its foreign exchange exposure And achieves an appropriate balance between forward contracts and currency options.
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 is outlined at the end of the case?
5. What hedging decision would you advocate?