The American Institute for Foreign Studies (AIFS) arranges foreign study programs and cultural relation tours forthe students in America. The firm's profits are primarily in U.S. currency, but a large number of its costs are experienced in Eurodollars and British pounds. The organziation’s managers look at the hedging behavior of AIFS. AIFS has a stated hedging rule, but the managers seek to reassess the percentage of exposure that is taken care of and the utilization of forward deals and options. AIFS establishes guaranteed values for its exchanges and tours annually in advance, prior to the final disclosure of its official sales. The managers need to make sure that the organization sufficiently hedges its foreign exchange risks and accomplishes an adequate balance between its forward contracts and currency choices.
Normal Scenario, Dollar Appreciation, Dollar Depreciation
1-yr Forward Rate (USD/EUR)Option PremiumVolumeCost per Student (EUR)
Cost Without Hedging, Gain/(Loss) from Forward Hedging, Net Cost After Hedging
Cost Without Hedging, Gain/(Loss) from Option Hedging, Net Cost After Hedging
1. What gives rise to the currency exposure at AIFS?
2. What would happen if Archer-Lock and Tabaczynski did not hedge at all?
3. What would happen with a 100% hedge with forwards? A 100% hedge with options? Use the forecast final sales volume of 25,000 and analyze the possible outcomes relative to the ‘zero impact’ scenario described in the case.
4. What happens if sales volumes are lower or higher than expected as outlined at the end of the case?