Hedging Currency Risks at AIFS AIFS’s two main divisions focused on serving American children who wanted to travel abroad. The company provided services to over 50,000 students a year and had revenues of about 200 million. The Study Abroad College division sent college-age students to universities worldwide for semester-long programs, and the High School Travel division organized 1-4 week trips for high school students and their teachers. The college division organized abroad programs for more than 5,000 American university-aged students during both the summer and academic year, in countries such as the United Kingdom, Australia, Austria, France, Italy, and many others. Pricing was based on an academic planning year, from July 1 st - June 30 th . The High School Travel division organized chaperoned educational travel for about 20,000 high school students across the U.S. The group traveled to countries such as China, Mexico, and various other countries across Europe and Africa. Pricing was based on a calendar year basis running from January to December. As we can see, foreign exchange hedging was an area of key importance for AIFS given the level of currency exposure it had in its business model. AIFS received most of its revenues in American Dollars (USD) from the American Students, but incurred its costs in other currencies, primarily Euros (EUR) and British Pounds (GBP). Hence, there is a currency mismatch from AIFS operating educational and cultural exchange programs throughout the world. Therefore, there were concerns regarding fluctuations in foreign currency values and other variable factors. Overall, if there was volatility in the currency market, and the value of the USD dropped vs the euro or the pound, AIF’s buying power... ... middle of paper ... ...preciates, the company can just give up the option premium and discard the options. However, if the company strongly believe that the USD will depreciate against EUR and think that it can bear the risk of appreciation of USD, it would need to put more weight in long futures contracts as much as they believe in by reducing weights in options. This is because they can earn even more money that could have been used for the option premium. The action of forecasting the direction of USD/EUR is still a risky action since the financial markets are complex than we think. The choices of the company’s proportion of hedging risks and what instruments to use are really depend on whether the company is risk adverse or not. However, since we have a historical data of USD/EUR, it would be more reasonable for the company to expect the USD depreciation and take an actions accordingly.
On the other hand, there are disadvantages on weaken dollar. Weaken dollar is bad for America citizen. Weaken dollar lifted price import. Consumers face higher prices on foreign products or services.
...y Fixed Exchange Rates: Recent Experiences." Introduction to International Economics. New York: Palgrave Macmillan, 2011. 368. Print.
Similarly, Country A’s investor might find viable to exchange Country A’s currency for Country’s B currency as a bridge to finally make a conversion to U.S. dollars. As a result, Country’s A currency will depreciate against Country’s B currency, and Country’s B currency will depreciate against dollar when the demand for U.S. dollar rises. Briefly, an investor in A exchange to B to take advantage of B-U.S. exchange ...
$384 per unit or "mark up" of 47% vs $764. per unit or "mark up" of 94% (not really a mark up, fixed costs not included).
...tious of shocks, good or bad, in bitcoins price when making investment or purchasing decisions with the currency.
Despite the fact that recent reports have shown that the Chinese currency is currently facing descending pressures, it is, however, likely to improve in the future because of the enhanced terms of trade, current account surplus that is growing, and high net saving. Another reason that will make the Chinese RMB to do well in the future it is because the currency has solid fundamentals and the economy of the country is significantly increasing at a higher rate than the GDP rates. Due to the growing Chinese economy to being the second largest economy, the Chinese currency yuan has been acknowledged by the International Monetary Fund (IMF) as a major global
...he US dollar as the only safe heaven. If this is correct, then in true circular fashion the US dollar would appreciate against all other currency, which its seems to have done according to the chart below especially after 1996.
The value of the US dollar relevant to other currencies is a major consideration for the Federal Reserve. If they prevent large changes in the value of the dollar, firms and individuals can comfortably plan ahead to purchase or sell goods abroad.
Walker, Bruce. "Euro Likely to Keep Losing Value." The New American. The New American Magazine, 7 July 2010. Web. 23 May 2011. .
Other types of exchange rate risks are translation risk and so-called hidden risk. The translation risk relates to cases where large multinational companies have subsidiaries in other countries. On the financial statement of the whole group, the company may have to translate the assets and liabilities from foreign accounts into the group statement. The translation will involve foreign exchange exposure. The term hidden risk evolves around the fact that all companies are subject to exchange rate risks, even if they don’t do business with companies using other currencies. A company that is buying supplies from a local manufacturer might be affected of fluctuating foreign exchange rates if the local manufacturer is doing business with overseas companies. If a manufacturer goes out of business, or experience heavy losses, it will affect all the companies it does business with. The co...
There are several methods in which foreign exchange rates can potentially be predicted which are based upon parity conditions, balance of payments, and the asset market. After an evaluation of each of these methods, an assessment will be provided suggesting the best approach for financial managers to utilize as they attempt to forecast exchange rates.
Economists have long taken the view that economic fundamentals determine exchange rates. Nevertheless, in the early 1970s, after the collapse of fixed exchange rate regimes of the Bretton Woods system, excess volatility, nonlinear and disorderly movements in exchange rates became mysteries that traditional exchange rate theory cannot explain. Recent scholar concluded “no definitive evidence that economic variable can forecast exchange rate for currencies of nations with similar inflation rates" which is known as “the disconnect puzzle” from Meese and Rogoff’s studies (1983). Thus, this essay aims to explain why is it apparently so difficult to forecast exchange rate movements, and to provide evidence from the relevant literature and the reference of three popular fundamentals-based models, including Monetary Model and Mundell-Fleming Model.
Hedging decisions whether its forecasts of foreign currency values may determine a firm hedges. Many firms attempt to stabilize their earnings with hedging strategies because they believe exchange rate risk is relevant. They must consider the various techniques to hedge the exposure so that it can decide which hedging technique is optimal and whether to hedge its transaction exposure. Companies may choose to hedge part or all of its known payables transactions using: Futures hedge, Forward hedge, Money market hedge, Currency option hedge.
Hence, in conclusion we can safely say that Euro does indeed pose a significant threat to the U.S. dollar.
The U.S. dollar is used in most international transactions, and so what happens to the U.S.A. economy will be affected by the international financial resources.