Essay about Aspen Technology, Inc. Currency Hedging Review

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Executive Summary Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that…show more content…
Not doing so could decrease Aspen’s growth abroad. While Aspen could reduce its foreign exchange exposure by reducing the amount of installment payments or by using other methods, this may not sit well with their current customers who may in turn reduce orders and find other suppliers in order to reduce the risk or the heavy costs that Aspen’s choices would leave with them. Because foreign exchange risk is a core risk for Aspen and has been managed fairly well until this point, we see no reason for them to overhaul their business model and risk alienating their customers. Foreign Exchange Exposure While we assume that 50% of German sales are still made in DM, in 1995, 25.9% of Aspen’s 1995 revenues are made in foreign markets, but only in Japan, in the UK and in Germany (increasingly) has the firm priced its products in local currencies. That means that, about 23.8% of Aspen total sales are made in foreign currencies, implying a foreign exchange exposure of $13,670,000. 29.7% of Aspen expenses are abroad and made in local currencies. So, Aspen is also exposed to foreign exchange risk with these expenses, mostly in Japan, Belgium and the UK (28.1% of the total expenses in 1995). Those expenses act as a natural hedge that decreases the total exposure of Aspen to foreign exchange risk. For its revenues and expenses, after “natural hedging”, the overall exposure of Aspen to foreign exchange risk is $9,484,000, with Belgium
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