Hedging Currency Risks at AIFS AIFS’s two main divisions focused on serving American children who wanted to travel abroad. The company provided services to over 50,000 students a year and had revenues of about 200 million. The Study Abroad College division sent college-age students to universities worldwide for semester-long programs, and the High School Travel division organized 1-4 week trips for high school students and their teachers. The college division organized abroad programs for more than 5,000 American university-aged students during both the summer and academic year, in countries such as the United Kingdom, Australia, Austria, France, Italy, and many others. Pricing was based on an academic planning year, from July 1 st - June 30 th . The High School Travel division organized chaperoned educational travel for about 20,000 high school students across the U.S. The group traveled to countries such as China, Mexico, and various other countries across Europe and Africa. Pricing was based on a calendar year basis running from January to December. As we can see, foreign exchange hedging was an area of key importance for AIFS given the level of currency exposure it had in its business model. AIFS received most of its revenues in American Dollars (USD) from the American Students, but incurred its costs in other currencies, primarily Euros (EUR) and British Pounds (GBP). Hence, there is a currency mismatch from AIFS operating educational and cultural exchange programs throughout the world. Therefore, there were concerns regarding fluctuations in foreign currency values and other variable factors. Overall, if there was volatility in the currency market, and the value of the USD dropped vs the euro or the pound, AIF’s buying power... ... middle of paper ... ...preciates, the company can just give up the option premium and discard the options. However, if the company strongly believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation of USD, it would need to put more weight in long futures contracts as much as they believe in by reducing weights in options. This is because they can earn even more money that could have been used for the option premium. The action of forecasting the direction of USD/EUR is still a risky action since the financial markets are complex than we think. The choices of the company’s proportion of hedging risks and what instruments to use are really depend on whether the company is risk adverse or not. However, since we have a historical data of USD/EUR, it would be more reasonable for the company to expect the USD depreciation and take an actions accordingly.
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...y equals the United States. Hence, in this new world of international monetary structure U.S. needs to be very careful about its economic policies or it may lose its dominance over the monetary markets internationally. However, in examining the U.S. economy in the recent past we realize that the trouble has already begun for e.g. The current account deficit jumped by about $100 billion annually during the three-year period 1998-2000, nearing $450 billion or about 4.5 percent of GDP in 2000. The net international investment position of the United States reached a negative $2 trillion at the end of 2000. Hence it is quite possible that in near future the dollar may experience some sharp depreciation, the evidence of which is reflected in the excel sheet attached.
With the theoretical part on FX exposure serving as background, this part focuses at some more practical issues that arise in terms of assessing the exposure. In order to manage the risk, a
...y Fixed Exchange Rates: Recent Experiences." Introduction to International Economics. New York: Palgrave Macmillan, 2011. 368. Print.
...rate was pressured by larger imports than exports, which caused increased the demand of other currencies and the supply of Russian currency (Carty, 2013, para. 4). Briefly, a trade deficit and high inflation both pressure the exchange rate to depreciate.
Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970s, after the collapse of fixed exchange rate regimes of the Bretton Woods system, excess volatility, nonlinear and disorderly movements in exchange rates became mysteries that traditional exchange rate theory cannot explain. Recent scholar concluded “no definitive evidence that economic variable can forecast exchange rate for currencies of nations with similar inflation rates" which is known as “the disconnect puzzle” from Meese and Rogoff’s studies (1983). Thus, this essay aims to explain why is it apparently so difficult to forecast exchange rate movements, and to provide evidence from the relevant literature and the reference of three popular fundamentals-based models, including Monetary Model and Mundell-Fleming Model.
Despite the fact that recent reports have shown that the Chinese currency is currently facing descending pressures, it is, however, likely to improve in the future because of the enhanced terms of trade, current account surplus that is growing, and high net saving. Another reason that will make the Chinese RMB to do well in the future it is because the currency has solid fundamentals and the economy of the country is significantly increasing at a higher rate than the GDP rates. Due to the growing Chinese economy to being the second largest economy, the Chinese currency yuan has been acknowledged by the International Monetary Fund (IMF) as a major global
Some firms may hedge the expected cash flows of a new project, so they should evaluate the project based on hedged exchange rates. Hedging FX risks and types of Risks: Transaction, Operating, and Translation. There is no relevant to FX risk because some give reasons such as Investors can hedge, Currency and Stakeholder diversification. Hedge FX risks is a tool, and some companies use it and the others not. It depends primarily on the economy globally and the companies policy.
Changes in foreign exchange rates affect decisions made by businesses, investors, governments, and consumers. The rate of currency exchange between countries can impact the prices of goods and services, the supply and demand of financial assets, and interest rates. Additionally, fluctuations in foreign exchange rates can impact the bottom line of a business holding foreign exchange denominated investments. The significant impact exchange rates can have on the global economy suggests understanding how to forecast exchange rates is essential.
The expanding global market has created both staggering wealth for some and the promise of it for others. Business is more competitive than ever before, and every business, financial or product-based, regardless of size or international presence is obligated to operate as efficiently as possible. A major factor in that efficient operation is to take advantage of every opportunity to maximize profits. Many multinational organizations have used derivatives for years in financial risk management activities. These same actions that can protect multinational organizations against interest rate futures and currency fluctuations can be used to create profits for those same organizations.
The foreign exchange market is one of important mechanism in the international business because foreign exchange is an intermediary for all nations in term of the growth of the economy. There are many functions of foreign exchange market in the global economy. In the international business, it uses the foreign exchange markets in four ways. First, the pay...
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.