Of all hedging combinations, this has lowest max gain and the lowest max loss and thus the smallest variance. Since the exchange rate is out-of-money, they can purchase the volume required at a favorable spot rate.
Analysis of the Issues: The third risk AIFS faces competitive pricing risk. Within these two partitions, AIFS sends a total of 25, students abroad: What happens to profits if the sales volumes are lower or higher than expected as outlined at the end of the case?
For instance, if actual sales volume ends up being less than expected e. Based on this projection they determine their pricing strategy and release their catalogue with the price guaranteed policy stated on it. Setting their program prices 6 months prior to the catalogue date based on sales volume and expense projections, gives way to many uncertainties that could heavily impact positively or negatively their cost base, and in turn their gross profit and net income.
This would in turn increase the currency exposure positively, neutrally, or negatively. The difference between 10, units and 30, units is the fact that with 30, the company is required to purchase additional currency at spot rates, regarding of the cover level.
For AIFS —a student exchange organization that offers education and travel programs all over the world- the fact that they do business domestically and internationally gives rise to several factors that exposes them to currency risk.
In this scenario is not easy to determine which is the best case scenario due to the many variables to take into consideration.
If the exchange rate lowers to 1. Bottom line risk is the risk that an adverse change in exchange rates could increase the costs faced by AIFS. This is roughly 1. Comments on Solutions and Strategies: The objectives of both Christopher and Becky align: More Essay Examples on Currency Rubric Currency exposure or currency risk is the type of risk that an individual or a company faces due to the fluctuation in price of one currency against another.
I consider it a happy medium. Additionally this option is the one where the lowest option premium is paid.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.
AIFS needs Euro to cover its costs, thus it can hedge through Put options (to sell dollars) or/and forward contracts to buy euros in the future. We further examine the possibilities of fully hedging with forward contracts and fully hedging with options by taking into account only the risk of the fluctuation exchange rate and consider the volume sales of 25.
Homework: Foreign Currency Transactions and Hedging – Hedging Currency Risk at AIFS Case 1 - Hedging Currency at AIFS introduction. What gives rise to the currency exposure at AIFS. We will write a custom essay sample on Hedging Currency at AIFS or any similar topic specifically for you Do Not Waste Your Time SEND By.
Related Documents: Hedging Currency Risks At AIFS Essay example Risk and Risk Management Essay. achieve global targets and compete with the other competitors. It shows that the company predict customer needs and handled well to risk.
Hedging Currency Risk at Aifs Essay. In case AIFS does not hedge at all, the costs either decrease by $5, if the exchange rate is USD/EUR, or remain unchanged in the ‘zero impact’ scenario or increase by $6, if the exchange rate is USD/EUR.
Hedging Currency Risk at AIFS: Assignment questions: Q. What gives rise to the currency exposure at AIFS? A.
AIFS is a company that specializes in providing educational and cultural exchange programs for college and5/5(8).Download