Aifs Case Havard Business School Essay

1. What gives rise to the currency painting at AIFS? 2. What would perish if Archer-Lock and Tabaczynski did not hedge at all? 3. What would happen with a coke% hedge with forwards? A 100% hedge with options? Use the picture final sales volume of 25,000 and analyze the possible protrudecomes relative to the zero in impact scenario described in the case. complete the spreadsheet.. 4. What happens if sales volumes are humiliate or higher than expected as outlined at the leftover of the case? 5. What hedging decision would you advocate?ANS 1American Institute for foreign Study (AIFS) had two divisions. 1. The College division, 2. High School motivate division. From the college division the students are sent to different parts of the world for semester extensive courses. From the second division the high school students as intimately as their teachers are sent for 1-4 week trips worldwide. More than 50000 students are sent out of the country each year on academic as well as cu ltural mass meeting programmes. For these two make upts AIFS requires different currencies otherwise than American sawbucks. When AIFS got major percentage of its revenue in American Dollars it has to expend near in Euros and British Pounds. If there volition be any exchange rate volatility, there will be currency mismatch. This gives currency exposure at AIFS.Ans-2If Archer-Lock and Tabaczynski would not hedge at all, they had to face the below triple risks. i) Bottom line risk When there will be an unseemly move of the exchange rate, there whitethorn be an increase in the cost base. If dollar depreciates, they have to pay more for unit dollar of Euro. ii) Volume Risk They have to buy foreign currency cardinal months before keeping some predicted value of future sales in mind. If the actual value differs from the predicted atomic number 53, there may be a occur of loss. iii) Competitive pricing risk They fix their price through the catalog and once price is fixed it diffi cult to change the price even if there may be a depreciation of dollars. This may reply in a huge loss to their business.Ans-3Refer leap out-sheet QUES-3Ans-4Refer excel sheet 4-Sales Volume 30000 and 4-Sales Volume 10000Ans-5According to Tabaczynski, the probability of the propagation that one gains from how the hedging is done, is identical as one may losing by doing so in the long run. Hedging by options is a rectify way to do so as in adverse situations you will only lose the premium amount you have paid. At the same time the company has not to pay any premium and may be benefitted by using futures, but there is a attention of huge loss that can be avoided by using options. So we will advice AIFS to hedge 50% with options and 50% with futures. In this hedging, the loss from the one type of hedging will be compensated by the other to some extent.