Aifs Currency Hedging Solution

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AIFS Case Finance in a Global Environment Rochester Institute of Technology Group 4 Mengjie Ban Liu Gu Danielle Sherwood Bill Speight Mohamed Waheed Summary The American Institute for Foreign Study, also known as AIFS, is a student exchange organization that specializes in academic and cultural exchange programs for both college and high school students. The AIFS was founded by Sir Cyril Taylor in 1964, in the United States, and is split into two divisions: the Study Abroad College division, based in London, and the High School Travel Division, based in Boston. Christopher Archer-Lock and Becky Tabaczynski, are the controller and CFO for the college and high school divisions, respectively. Approximately 50,000…show more content…
There are three types of risk that AIFS faces with respect to currencies: bottom-line risk, volume risk, and competitive pricing risk. Bottom-line risk is defined as “the risk that an adverse change in the exchange rates could increase the cost base”. Volume risk is the risk of having too much or too little of the currency based on the fact that projected sales will be different than the actual sales. The third type of risk is competitive pricing risk and is the fact that AIFS cannot change its prices even if the currencies are changing for fear of losing their customers. In order to manage, or ultimately minimize, these risks, AIFS uses currency hedging techniques. Hedging activities begin approximately six months before the prices are due for the catalogs for the college division. For the high school division, the hedging took place throughout the year: 25% by December, 40% by the end of March and 100% by June when the pricing for the catalog is due. Problem Statement AIFS wants to offset any change in the exchange rates that may adversely affect their profit margins by using currency forward contracts and currency options. These hedging activities work to offset the three types of risk defined above as bottom-line risk, volume risk, and competitive pricing risk. Since these hedging activities must be put in place two years before the actual year of sales, AIFS must decide the proportion and cost
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