Topic > Currency Risk Hedging at AIFS - 1264

Currency Risk Hedging at AIFSAIFS' two main divisions focused on serving American children who wanted to travel abroad. The company provided services to over 50,000 students per year and had revenues of approximately 200 million. The Study Abroad College division sent college-aged students to universities around the world for semester-long programs, while the High School Travel division organized 1-4 week trips for high school students and their teachers. The university division organized programs abroad for more than 5,000 college-aged American students both during the summer and the academic year, in countries such as the United Kingdom, Australia, Austria, France, Italy and many others. Prices were based on an academic year schedule, from July 1st to June 30th. The High School Travel division has organized chaperone-led educational trips for approximately 20,000 high school students in the United States. The group traveled to countries such as China, Mexico and various other countries in Europe and Africa. Prices were based on the calendar year from January to December. As we can see, currency hedging was an area of ​​critical importance for alternative investment funds, given the level of currency exposure it had in its business model. AIFS received most of its revenues in US dollars (USD) from American students, but incurred costs in other currencies, mainly euros (EUR) and British pounds (GBP). Therefore, there is a currency mismatch on the part of the AIFS which runs educational and cultural exchange programs around 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 US dollar fell against the euro or the pound, the purchasing power of the AIF... half the paper... appreciates, the company can simply give increase option premium and discard options. However, if the company firmly believes that the dollar will depreciate against the euro and thinks it can bear the risk of an appreciation of the dollar, it should give as much weight to long futures contracts as it believes, reducing the weights in options. This is because they can earn even more money that could have been used for the option premium. The action of predicting the direction of the USD/EUR exchange rate is still a risky action since financial markets are complex than we think. Choosing the proportion of risk hedging company and the tools to use actually depends on whether the company is risk averse or not. However, since we have historical data of USD/EUR, it would be more reasonable for the company to expect a depreciation of the dollar and take actions accordingly.