Hedging Currency Risks At Aifs

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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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  • Explains that the company provided services to over 50,000 students a year and had revenues of about $1 million.
  • Explains that countries such as the united kingdom, australia, austria, france, italy, and many others.
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