1 ) What gives rise to the foreign currency exposure for AIFS? 2 . What happens if Archer-Lock and Tabaczynski did not hedge at all? 3. What happens with a totally hedge with forwards? A 100% hedge with alternatives? Use the prediction final product sales volume of twenty-five, 000 and analyze the possible outcomes relative to the ‘zero impact’ scenario referred to in the case. total the schedule.. 4. What goes on if revenue volumes are lower or more than predicted as layed out at the end of the case? 5. What hedging decision would you advocate?
ANS one particular:
American Company for foreign Study (AIFS) had two divisions.
1 ) The College department, 2 . High School travel division. From the school division the students are delivered to different parts of the world pertaining to semester extended courses. From your second section the kids as well as their teachers will be sent to get 1-4 week trips around the world. More than 50000 students are sent out in the country every year on academic as well as cultural exchange programs. For these two events AIFS requires several currencies other than American us dollars.
The moment AIFS got major percentage of the revenue in American Us dollars it has to make use of most in Euros and British Pounds. If you will see any exchange rate volatility, there will be money mismatch. Thus giving currency direct exposure at AIFS.
If perhaps Archer-Lock and Tabaczynski will not hedge at all, they had to handle the beneath three hazards. i) Bottom line risk: The moment there will be a bad move in the exchange level, there may be an increase in the cost foundation. If dollars depreciates, they must pay more to get unit dollar of Euro. ii) Volume level Risk: They need to buy foreign exchange six months just before keeping several predicted benefit of upcoming sales in mind. If the genuine value varies from the predicted one, there might be a chance of loss. iii) Competitive charges risk: They fix their particular price throughout the catalog and once price is fixed it difficult to improve the price whether or not there may be a depreciation of dollars. This might result in a large loss to their business.
Refer excel-sheet: QUES-3
Refer exceed sheet: “4-Sales Volume 30000 and “4-Sales Volume 10000
According to Tabaczynski, the probability of the times that one profits from how the hedging is carried out, is just like one may shedding by doing so over time. Hedging simply by options is known as a better way to do so as in adverse conditions you will only lose the premium amount you have paid out. At the same time the business has not to pay virtually any premium and may even be benefitted by using options contracts, but we have a fear of large loss that could be avoided by using options. So we is going to advice AIFS to hedge 50% with options and 50% with futures. With this hedging, losing from the one type of hedging will probably be compensated by the other to some degree.