Hedging Currency Risks at Aifs

Summary:

AIFS is a business that organized educational and cultural exchange programs throughout the world. The major divisions are the Study Abroad College division and the High School Travel division. 
AIFS receives revenues in USD, but incurred its costs in other currencies, which is why foreign exchange hedging is a very important issue for AIFS. 
 The 3 types of risk that AIFS is covering with hedging are: 
 Bottom-line risk: meaning an adverse change in exchange rates could increase the cost base. Volume risk: AIFS bought the foreign currency based on forecasted sales volumes, but in the moment that they would incur there would be differences from projected sales.
 Competitive pricing risk: AIFS guaranteed that rate changes could not affect price.
 Two main instruments that AIFS is using to hedge the risk are forward contracts and currency options. 
The problem is that they have to do the hedging before sales. Archer-Lock (London-based controller for student exchange) and Becky Tabaczynski (CFO of group’s high school travel division) are worrying about (a) what expected costs should they cover and (b) in what proportions should AIFS use forward contracts and options? 



Conclusion:



Hedging is considered to be insurance, especially for international companies. But as in all insurance contracts, you have to pay money for it, but which kind of hedging is cheaper in different cases and how much should we hedge? 
The model that Tabaczynski created is very interesting and it gives a better understanding of how hedging may be in different scenarios. It’s not easy to decide 100 % between hedging with options or forwards. But considering the fluctuations that USD, Euro and GBP are having in the recent years I would chose to hedge with options (at least 70%) and the other part with forwards. As Elvin mentioned, option is a more expensive solution, but is more secure. If AIFS hedges with forwards it may lose more money because it may need to exercise the...