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AIFS – How to Hedge Currency Risk

Master Course: Harvard Business Case Studies Lecturer: Prof. Ted Azarmi, PhD Presenters: Mr. Sokol Dema Mr. Michael Marquardt Ms. Lin Junxi Ms. Li Chi Ms. Wei Jiang Date: 21.06.2010

Overview

1. 2. 3. 4. 5. 6. 7. Introduction/case summary: AIFS Activities and Business Model Catalogues, Guaranties, Pricing Time-line and, why to hedge? Risks AIFS was exposed to and instruments it used to hedge against them Shifting Box of AIFS Tabaczynski’s spreadsheet calculations Conclusions drawn Reference sources

21.06.2010 Project - Harvard Business Case 2

1. Introduction/case summary

• Foreign Exchange Hedging

⇒ AIFS received most of its revenues in American ($) but incurred its cost primarily in Euros (€) and British Pounds (£) ⇒ AIFS hedged 100% of its future cost commitments up to 2 years in advance with a combination of currency forwards and currency option contracts: Key Questions: 1. What is the percentage of the expected costs AIFS should cover? 2. What is the proportion of forwards and options that AIFS should utilize?

21.06.2010

Project - Harvard Business Case

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1. Activities of AIFS

 Founded in 1964, by Sir Cyril Taylor the American Institute For Foreign Study (AIFS) is one of the oldest, largest and most respected cultural exchange organizations in the world. With global offices in 15 countries, it organizes academic/cultural exchange programs for more than 50,000 participants each year.  The programs include college study abroad, au pair placement, camp counselors and staff, gifted education, high school study/travel and insurance services.  In 1967, AIFS created the AIFS Foundation with the assistance of one of the most visionary political leaders, the late Senator Robert F. Kennedy.

21.06.2010

Project - Harvard Business Case

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1. Business Model of AIFS

⇒There are two major ddivisions:

1. College Division

-Volume of 5,000 American university aged students - Low volume- High margin...