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...
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...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.
I also invested in currencies like the US dollar, the Canadian dollar and the New Zealand dollar. I found that the US dollar dropped by a considerable amount whilst the Canadian dollar and the New Zealand dollar had a minimal increase in
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.
compared to the dollar. If the yen depreciates and Tiffany converts their yen at the current
...f you know that currency that you are dealing with fluctuates by about 3 percent per year to USD, then you could easily charge 3 percent more for the product or services you offer in that country, in the USA particular to my example. By charging 3 percent more, you will get a baseline price if the currency will decline by 3 percent, and if the currency declines less than 3 percent ,the company will get an extra income. No one knows the best practices on how to mitigate the exchange risk, but still every company has some strategies that they can implement to decrease the risk and increase the profit. Overall, the foreign currency exchange risk is just something that every business should be able to deal with in a global economy, as long as they are not afraid to accept strategies that sometimes will take a little longer to see the results or they can failed in fact.
...tious of shocks, good or bad, in bitcoins price when making investment or purchasing decisions with the currency.
Therefore, MNCs need to always interact with foreign governments and other businesses partners in their respective foreign currencies for settle the cost problem, try to reduction of cost. Moreover, in the process of dealing with foreign currencies, any sort of currency exchange rate fluctuations can influence the firm’s expected future cash
and imports. With a forward market, one trade flow benefits and the other trade flow necessarily loses from changes in either the expected rate or the volatility. So the imports and exports are defined to be the different sides of forward market and they might be impeded or benefited from changes in exchange rate volatility. They conclude that exchange rate volatility can be detrimental or beneficial to both export and imports depending on net currency position of the
Therefore the exchange rate will decrease below $1.35 pound. For business or governments that trade billions of dollars even small changes in the exchange rate become
Economic risk is another type of exchange risks companies have to consider when dealing globally. Changes in exchange rates are bound to affect the relative prices on imports and exports, and that will again affect the competitiveness of a company. An UK exporter dealing with companies in the US would not want the US$ to depreciate, because it would make the exports more expensive for the US market, thus the company will loose business.
During the year 2012, Australian Dollar (AUD) is the 5th most traded currency in the world, accounting for 7.6% of the world’s daily share. The Australian dollar is popular with currency traders because of the comparatively high interest rates in Australia, the relative freedom of the foreign exchange market from government intervention, the general stability of Australia's economy and political system, and the prevailing view that the Austra...
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.
It mitigates the financial risk of an option by hedging against price changes its underlying. It is called as Delta. It is the first derivatives of the option’s value with respect to underlying instruments price. This strategy used for financial instruments. This is performed in practice by buying a derivative with inverse price movements.
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
these table, it shoes that the Australian dollar's strength is broad based against the currencies
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