HEDGING CURRENCY RISKS AIFS PDF

What gives rise to the currency exposure at AIFS. Get Your Custom Essay on Hedging Currency at AIFS Get custom paper Currency exposure or currency risk is the type of risk that an individual or a company faces due to the fluctuation in price of one currency against another. For AIFS —a student exchange organization that offers education and travel programs all over the world- the fact that they do business domestically and internationally gives rise to several factors that exposes them to currency risk. Their business operations give way to another factor that accentuates their currency exposure. This policy states that regardless of how the currencies fluctuate, positively or negatively, the company cannot modify their current catalogue prices. What would happen if Archer-Lock and Tabaczynski did not hedge?

Author:Dom Kajin
Country:French Guiana
Language:English (Spanish)
Genre:History
Published (Last):28 June 2006
Pages:117
PDF File Size:12.28 Mb
ePub File Size:8.82 Mb
ISBN:740-1-74430-780-1
Downloads:24748
Price:Free* [*Free Regsitration Required]
Uploader:Kazigal



That means, with the current spot rate of 1. Comparing the results of the table shows the advantages and disadvantages of each strategy. In the case of a strong dollar 1. In total the costs still sink by 3,, because the effect of the lower spot rate compensates the premium.

Using only forward contracts to hedge results into no impact on the costs in any case since the exchange rate is fixed no matter what happens and there is no initial cost entering the contract. The impact on the cost if nothing is hedged arises merely from the difference in the spot rate and is much stronger than in the hedged case. Since the company is highly affected by news of war, terrorism and political instability, events which are impossible to predict, I would suggest to alter their hedging policy and use mainly options for hedging.

Options instead would give the company more flexibility, which is a major issue since not only the exchange rates fluctuate but also the volume of participants.

In this way AIFS would fix the costs for a quarter of their exposure and still be flexible enough to react to different market circumstances and unforeseen events. In addition the company should continue to deal with 6 different banks to reduce the counterpart risk. In the following table the impact on the costs in different scenarios are summarized using the same methodology as in the table above.

Instead of derivatives, an alternative possibility for AIFS to hedge their currency exposure would be to set up accounts abroad in foreign currency up to a certain amount. This would simplify the hedging approach and it would be reasonable the business model of AIFS forces them to keep foreign exchange every year.

Cite this page.

ELECTRONICS AND COMMUNICATION SIMPLIFIED A.K.MAINI PDF

Hedging Currency Risks at AIFS

That means, with the current spot rate of 1. Comparing the results of the table shows the advantages and disadvantages of each strategy. In the case of a strong dollar 1. In total the costs still sink by 3,, because the effect of the lower spot rate compensates the premium.

KAMIL WAIS PDF

Hedging Currency at AIFS Essay

Case Solution 2. This contract is no more expansive but has limited flexibility as compared to the options contracts. If the current market price crosses the strike price agreed in contact, then the contract buyer can use the option of right to call, which means that the contract seller will be responsible to fulfill the contract by selling agreed currency on the strike price. However,it would be expensive to the company. At stable dollar, the amount would present the cost of the total volume of sales with no hedging strategy and that the amount meets with the projected cost, as a result,there would be no effect unless and otherwise, the US dollar gets stronger or weaker against the Euro. If the dollar gets stronger against the Euro, then the company would have positive impact, because the carrying cost will decrease, and if the situation is opposite, in which the US dollar gets weaker against Euro, then there will be negative impact. Therefore, in order to avoid these negative impacts, there are strategies as discussed above, and given in Exhibit 1.

Related Articles