Hedging currency risks at AIFS
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, HEDGING CURRENCY RISKS AT AIFS 2
Hedging currency risks at AIFS
Two separate programs are operated by the AIFS, including semester-long programs
for high school students and a similar one for college students. The students are sent to
different countries in the European Union as a means of completing a cultural or educational
exchange program (Desai, Dessain, and Sjoman, 2007). The students originate from the
united states hence meet their payment expenditure in dollars. This means that the revenues
which are collected by AIFs are in dollars. The student uses the currency of the country to
which they are sent to meet the program costs. Taking this into consideration, the rise to the
currency exposure at AIFs is promoted by competitive pricing, volume risk, and bottom-line
risk. The cost base is increased as a result of the adverse change in exchange (Bottom-line
risk) (Coyle, 2000). The purchase of foreign currency based on projected sales volume, which
turns to be different from the final sale volume, poses the volume risk. The risk of
competitive pricing can be explained in that the AIFs price guarantee is independent of the
fluctuating currencies’ rates and also the increase in prices.
In the proposition that the AIFs fails to hedge at all, currency risk will hit the
company. This refers to unexpected movements in foreign currencies. The revenues
generated by the company are in US dollars while incurred costs by the exchange students are
in foreign currencies and more so euros and British pounds (Desai, Dessain and Sjoman,
2007). This affects either an increase or a decrease in the cost of expenses. An increase in the
British pound or euro will lead to a higher payment of USD amount by the company. On the
other hand, a decrease in the British pound or euro will lead to the lower payment of USD
amount by the AIFS.
A total of $30.5 million is the resultant total cost under the zero impact scenario with
an exchange rate of USD 1.22/EUR and an expected sales volume of 25,000. A lower
Author’s name:
Institutional affiliation:
Course number:
Instructor:
Due date:
, HEDGING CURRENCY RISKS AT AIFS 2
Hedging currency risks at AIFS
Two separate programs are operated by the AIFS, including semester-long programs
for high school students and a similar one for college students. The students are sent to
different countries in the European Union as a means of completing a cultural or educational
exchange program (Desai, Dessain, and Sjoman, 2007). The students originate from the
united states hence meet their payment expenditure in dollars. This means that the revenues
which are collected by AIFs are in dollars. The student uses the currency of the country to
which they are sent to meet the program costs. Taking this into consideration, the rise to the
currency exposure at AIFs is promoted by competitive pricing, volume risk, and bottom-line
risk. The cost base is increased as a result of the adverse change in exchange (Bottom-line
risk) (Coyle, 2000). The purchase of foreign currency based on projected sales volume, which
turns to be different from the final sale volume, poses the volume risk. The risk of
competitive pricing can be explained in that the AIFs price guarantee is independent of the
fluctuating currencies’ rates and also the increase in prices.
In the proposition that the AIFs fails to hedge at all, currency risk will hit the
company. This refers to unexpected movements in foreign currencies. The revenues
generated by the company are in US dollars while incurred costs by the exchange students are
in foreign currencies and more so euros and British pounds (Desai, Dessain and Sjoman,
2007). This affects either an increase or a decrease in the cost of expenses. An increase in the
British pound or euro will lead to a higher payment of USD amount by the company. On the
other hand, a decrease in the British pound or euro will lead to the lower payment of USD
amount by the AIFS.
A total of $30.5 million is the resultant total cost under the zero impact scenario with
an exchange rate of USD 1.22/EUR and an expected sales volume of 25,000. A lower
