Aifs - Hbs Case

1. What gives rise to the currency exposure at AIFS?

AIFS is generating its revenues in USD whereas most of its cost is in GBP or EUR. Indeed, the inherent business model of AIFS is to sell in USD study abroad programs to American students and to pay the overseas schools in foreign currency.

AIFS’s revenues are fixed (as the company commits to its catalogue prices) and its costs are fluctuating depending on the macro environment. Thus AIFS cannot pass down the cost fluctuations to customers.

What exacerbates this issue is the fact that AIFS’s sales volumes are not precisely known at the time the company enters into its foreign exchange hedging agreements, giving rise to “over” or “under” hedging.

2. What would happen if Archer-Lock and Tabaczynski did not hedge at all?

If Archer-Lock and Tabaczynski did not hedge at all, they would be exposed to major currency risks that might put them in a difficult financial situation and ultimately take them out of the business. In deed the case discusses the potential event where the dollar loses 30% of its value then the company could go out of business if its cost increase by 30%. On the upside, AIFS could also benefit with an appreciation of US$ which might be beneficial to the business.

3. What would happen with a 100% hedge with forwards? A 100% hedge with options? Use the forecast final sales volume of 25,000 and analyze the possible outcomes relative to the ‘zero impact’ scenario described in the case.

In case of a 100% hedge with contracts, Archer-Lock and Tabaczynski will have to lock the currency rate at 1.22 USD/EUR. As a result no matter what will be the currency rate in the future, they will have 1.22 USD for each Euro. In that case they will be perfectly hedged, they will have no additional losses or gains from currency appreciation or depreciation given that case assumes a “zero impact” for a cost per participant at $1,220 (or 1.22 USD/EUR). This assumes that sales achieve the target of 25,000 and that...