Hedging Currency Risks At Aifs Harvard Case Solution & Analysis

Hedging Currency Risks At Aifs Case Study Help

Archer-Lock and Tabaczynski did not Hedge

As indicated by the information given for the situation, AIFS offers programs to those understudies who are inclined towards visiting other countries for social trade programs. The organization has two significant divisions, which are overseen by the Archer-Lock. Tabaczynski, who is the CFO of investigation abroad division and the secondary school travel division. He funds both of thesedivisions.The organization is facing the issue, which is that its income is in Dollar’s group and its expense is in Euros and British Pounds categories. These distinctive division money managing convince the organization to support its external trade dangers by utilizing diverse support instruments.

Tabaczynski utilizes the cash supporting to make sure that AIFS's income creates sources and variance of the money rates. In the event if AIFS wouldn’topt for supporting, at that point, the organization would be required to make full presentation on the cash dangers, which would cause misfortune in dollar divisions. (Whenever discovered devaluation in the US dollar).Then again, it can likewise have the benefit if the USD increases in value. As a general rule; future is strange and unpredictable, due to which the business volume of the organization can't be anticipated precisely, and the samefor the trade rates.

On the off chance that any of these two factors deteriorate in not so distant future, then the organization would incurthe loss in a huge number of dollars. By doing this, the expense would likewise increase massively, which would result in huge measure of assets into costing. For instance, if the organization anticipates that 25,000 understudies should join their program every year, and if the USD trades rate decaywith 1.01 per Euro then the organization could have a profit regarding an increment in incomes, which is about 5.25 million dollars. Be that as it may, if the USD trade rates decay against the Euro cash with USD1.48/Euro, then it would cause an incurrence of loss i.e. USD 6.5 million.

Hedge with Forward and Hedge with Option

100 Percent with Forward Contracts

If a strategy doesn’t work after it being used, then there is another strategy that has chances to work well, which is hedging with 100 percentforward strategy.However, there wouldn’t be any straightforward payment if this strategy is in use. Though, in the case of USD per EUR; the price would reduce, after which one cannot step away from the contract, and that one party cannot get the benefit of the profit alone in case of the adverse situation. This contract is less expensive, but has limited flexibility as compared to the options contracts.

100 Percent with Options:

This alternative gives increasingly adaptable opportunities of settling on the choice, on any circumstance. If the present market value crosses the strike cost concurred in the contact, at that point the agreement purchaser can utilize the alternative of option to call, which implies that the agreement dealer will be dependable to satisfy the agreement by selling concurred cash on the strike cost. Be that as it may, it is costly to the organization. Additionally, in the event when the organization purchases 25 million Euros contracts against the US dollar, 5 percent of Notional of US dollars’ worth will be charged as 1.525 million dollars as the cost against the alternative agreements.

Sales Volume Lower or Higher than Expected

If the sales volume decreaseat a higher rate than the expected, then the expectations will be negative in contrast to the sales volume being higher than the expected, which provides  positive windfall while opting for hedging.

Recommendations

AIFS has three different strategies with different level of prices that can take place, therefore there will be many possible outcomes given in the table,which shows that if the dollar gets weaker then what will it cost to the organization, to make an international trip.And in case, if the dollar get strong, then the question arises as to what step will the company take.

With respect to the percentage of contract and options given in every level, carrying the cost of options is included in the calculated cost in all three columns, because it will provide the clearest view of the situation at that time. In order to face any other situation in the future, the given table will help to project most near values in the future, which could meet the future sales forecast..............................

 

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