...semester-long exchange programs. The high school division, which was founded as the American Council for International Studies (ACIS), is controlled by Becky Tabaczynski and sends high school students and their teachers on 1-4 week long trips. This nature of business involves a certain amount of bottom-line risk. AIFS focuses largely on American students studying abroad, therefore the majority of their revenue is in American Dollars (USD). However, AIFS costs’ are generally incurred in foreign currency (primarily Euros (EUR) and British Pounds (GBP)) because the services they arrange for happen abroad. Due to their business activities involving foreign currencies, an unfavorable change in the exchange rate could result in a higher cost base, and potentially a loss overall if the change is significant enough. Inherently, due to the nature of their business, AIFS is exposed to currency risk because they are dealing in multiple currencies, however there is another factor that gives rise to currency exposure as well; the AIFS price guarantee. AIFS’s business is catalog-based, which means they have to set their prices well in advance of the actual service provided, general by June 30th of the previous year. Once they decide on the price and list it in the catalog, they guarantee that the price will not change until the...
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...2.0 Pros and cons of hedging Currency hedging First, according to Leveque, Kokenge and Rhodes (2013) and Western Union Holdings Inc. (n.d.), financial investors and business used currency hedging to minimize the risk they might be suffered when conducting business internationally. Some said, hedging can be connected to an insurance policy which minimizes the effect of foreign exchange risks. Besides, currency hedging enables an investors to minimize and direct the risk engaged in foreign investment, as well as reduce the losses. Also, it can be used to protect the value of the foreign currency cash flows of a multinational company by allowing hedgers or investors to reduce the impact of foreign exchange risks (Thinking Made Easy, 2010). Although...
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...assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that Aspen hedge completely its exposure but after “natural hedging”, which we recommend increasing thanks to the larger financial capacities allowed by its IPO. Using options for aggregated positions (by estimating yearly sales per currency),rather than having multiple forwards contracts, seems reasonable becauseit would enable the company to benefit from good moves in the currency exchange rates, to pay less in transaction costs because of the larger amounts and at the same time use its current human resources (limited hedging skills) by avoiding complex, expensive products. Business and Marketing Strategy Aspen Tech’s business strategy and marketing strategy create financing needs due to the position Aspen puts itself in with its customers. Aspen allows installment payments that hurt the company’s cash flows and in turn require financing to generate enough cash flow to pay for Aspen’s annual...
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...Introduction: Overview of the hedging techniques: In the financial market, almost all of companies need to face the currency risk. In order to manage the currency risk, companies will use different hedging techniques, such as financial and operational hedging techniques. For example, money market, futures contracts, options and forwards contracts are commonly used by firms, as well as operational hedging techniques. All of 4 types of financial hedging techniques are short-term hedge. Money market is a part of financial markets for assets involved in short-term borrowing,lending, buying and selling. Its features are high liquidity, lower risk, such as treasury bills. Futures contracts are future transaction for buying or selling, and made by Futures exchange. The date and place of the transaction have been provided. There are some features of futures contracts. Quantity, commodity and quality have been limited, excepting the price. Also, it cannot be done over-the-counter. Options is a financial tool, which based on futures. If purchaser hold the options, he/she will has a right, not the obligation, to buy from or sell to the seller of the provided commodity in the future as the same price as the price agreed now. The last financial hedging technique, forwards contracts, is a non-standardization contact between two parties to sell or buy in the future. Curb-exchange and cash transaction are the feathers of forward contact. This essay will focus on two operational hedging techniques, market...
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...a relatively long lead time between when prices were locked in and when the payment from students was received (over a year in the college student program) resulted in a significant amount of uncertainty regarding the company’s primary operating cost. The potential variance in the annual volume of students enrolled in the company’s programs also created issues with currency exposure. Hedging based on projected sales totals is difficult, especially when certain events that can materially impact volumes are well beyond the company’s control. If no hedging was done, the company would be fully exposed to the movements in exchange rates after each price was set/catalog was issued. The magnitude and direction of the movements from when the price was locked in would determine the gain or loss on each individual trip that was booked. This would cause the company’s cash flows to be quite volatile, and this uncertainty would create a litany of problems for the company. Managing working capital and liquidity, obtaining financing, and undertaking capital budgeting would be exceedingly difficult without some level of hedging. A 100% hedge with forward contracts removes any of the volatility associated with the transaction, assuming that exactly 25,000 students purchase a trip package. This is because the forward contract is a commitment, rather than an option,...
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...countries. However, along with these opportunities come various risks to these companies. One of the main risks these companies will face is foreign currency exchange rate risk. Companies that plan to set up operations in a foreign country must exchange its domestic currency into the currency of the host nation to buy the necessary building materials, supplies, and other necessary resources that the operations will require (Hill, 2009). For example, if a U.S. company desires to set up operations in the country of China, it will have to exchange U.S. dollars currency into Chinese currency-the Yuan. If a company in Japan wants to set up operations in Spain or Italy, it would have to exchange its currency- the Yen into these countries’ currency, which is the Euro. The foreign currency exchange rates between these countries consistently fluctuate causing one to appreciate or depreciate against the other. The unpredictable movement of the foreign currency exchange rates can have adverse effects on a company’s investments, and profits that have operations in a foreign country. Foreign companies with operations in the U.S. normally convert the dollars it earns back into its domestic currency (Hill, 2009). The main foreign currency exchange risk these foreign companies may face is the depreciation of its domestic currency against the currency of the U.S.-the dollar. This transaction can cause potential detrimental actions to its revenues and profits. Mitigating these risks and challenges...
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...Technologies Case Analysis Link Technologies Case Analysis Link Technologies Case Report The derivatives program was reducing risk when the firm was investing in foreign currency futures for the first four months from the implementation date (February 1991 to May 1991). This is seen by the negative correlation of (0.94226594) between the derivative (futures) cash flow and the unhedged cash flow. A purpose of a perfect hedge is to obtain a net of zero or in other words, reduce your risk to nothing not including the cost of the hedge. If a correlation is negative, as it was for the first three months, it means that investing in futures contracts was the right move because the cash flows are moving in opposite directions to minimize the risk. Another way to evaluate the performance of the hedging strategy is to compare the variance of unhedged cash flow and the hedged cash flow, expecting that that variance of the unhedged should be greater than the hedged cash flow. As seen in the table below, the variance of the unhedged is greater than the variance of the hedged when Link Technologies invested in currency futures contracts. Futures Variance | | Unhedged CF | 20,691,861,693.67 | Hedged CF | 2,774,199,924.92 | Difference | 17,917,661,768.75 | Even though, the hedging program was perfectly implemented, Mr. Lee strongly believed that investing in futures was the wrong approach because the company experienced a loss of half a million dollars...
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...Key Term: Hedging The key term for week four forum will discuss hedging. I chose this topic because I thought it would be insightful to discover hedging procedures that protect businesses in Italy from increase or decrease in the exchange rates of currency. As for emerging markets, many companies in Italy including State Railways, Autostrade and BT’s Albacom, are getting into the telecoms market as infrastructure and service suppliers. (Cazzani, p. 65) Hedging is defined as measures taken by a company or corporation to protect itself from loss that may occur because of fluctuations in the exchange rate of currency. International corporations that operate globally conduct the majority of hedging in global markets. Our text also pointed out a very important fact to be mindful of while hedging, in that, although hedging may guard against loss, it may significantly destroy potential for great unexpected profits. (Satterlee, p. 145) So I would caution companies in deciding to engage in hedging because it may cause them to lose out tremendously in the future. Speaking of some of the dangers of hedging, the article chosen for summarization discussed when proxy hedging goes badly. We all know that as time changes, so do global markets. And these changes can have adverse effects on corporate treasurers. For a while the Deutsche mark has served well as a proxy hedge for other currencies. However, overtime a good portion of European currencies decided to leave the Deutsche...
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...Tutorial Answers 6 1. Transaction Exposure. Fischer Inc., exports products from Florida to Europe. It obtains supplies and borrows funds locally. How would appreciation of the euro likely affect its net cash flows? Why? ANSWER: Fischer Inc. should benefit from the appreciation of the euro, because it should experience a strong demand for its products when the euro has more purchasing power (can obtain dollars at a low price). 2. Transaction Exposure. Aggie Co. produces chemicals. It is a major exporter to Europe, where its main competition is from other U.S. exporters. All of these companies invoice the products in U.S. dollars. Is Aggie’s transaction exposure likely to be significantly affected if the euro strengthens or weakens? Explain. If the euro weakens for several years, can you think of any change that might occur in the global chemicals market? ANSWER: If the euro strengthens, European customers can purchase Aggie’s goods with fewer euros. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company will not gain a competitive advantage. Nevertheless, the overall demand for the product could increase because the chemicals are now less expensive to European customers. If the euro weakens, European customers will need to pay more euros to purchase Aggie’s goods. Since Aggie’s competitors also invoice their exports in dollars, Aggie Company may not necessarily lose some of its market share. However, the overall...
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...develop appropriate hedging strategies to protect them. Exchange rate risk is the unexpected exchange rate that may cause an organization to lose or gain income. Currency hedging is a method of minimizing the exchange financial rate risk within an international organization. Global Companies involved in operations should have good understanding of the financial risks that the company could go through prior to starting its venture. Exchange Rate Mechanisms Currency hedging is “a particular hedging strategy used to reduce risks in the foreign exchange market which are used as in any hedging situation, where one security would be offset by another security, such as holding a short and long position of the same security at the same time, (Investor Words, 2009).”This content can be found on the following page:http://www.investorwords.com/6779/ Is impossible to predict how much the currency will be worth on the exact day that company will be converting it. With hedging, the uncertainly is gone. When companies decide to expand their business into growing globally the company will have to deal with many new issues that would not have affected them if they would have continued doing business locally. The exchange rate is a very important factor when doing international business. This must be continually monitored. Any changes in the exchange rate can globally affect the company. A significant growth in number of banks as well as business websites that offer currency hedging, regardless of...
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...exposure of the foreign exchange rate risk. In doing so, the overall profile of the company is discussed; the current foreign exchange risk management instruments are described; and conclusions are drawn, followed by recommendations. International Risk Management: An Analysis of 3M’s Foreign Risk Management International Risk Management: An Analysis of 3M’s Foreign Risk Management Contents Executive Summary 3 Introduction 4 1. Description Historical Exchange Rates 6 2. Foreign Currency Exchange Rate Risk 10 2.1. Current Strategy to Manage Exchange Rate Risk 10 2.1.1. Cash Flow Hedging 10 2.1.2. Net investment hedging 13 2.2. Currency Translation Effects on Business Segments 14 3. Appreciating and Depreciation of Domestic Currency and Foreign Exchange Rate Risk Management 15 3.1. 3M’s Domestic and International Transactions 15 3.2. Appreciation of the Domestic Currency 17 3.3. Depreciation of the Domestic Currency 17 4. Implications of 3M’s Derivatives 18 4.1. Forward and Futures Contracts 18 4.2. Options 19 4.3....
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...Student Name: Sanjay Kumar Gupta SMS Id: 110604 Center: Grand Mall – Gurgaon Assignment: International Financial Management Batch: PGCBM-21 Title: MNC Response to Currency Crisis Professor Name: Dr. HK Pradhan MNC Response to Currency Crisis Introduction A currency crisis means a decline in the value of country currency, the decline in value of currency have impact on the economy of country negatively. Decline in value of currency means same currency will not buy anther currency as it was buying earlier. Currency crisis happens because of investor expectation/act and the result of those acts. Currency crisis generally happens due to sudden devaluation of the currency. Following are the reason which makes a currency crisis: 1. Current account deficit. 2. Currency value increased rapidly. 3. Uncertainty over government actions and policies. 4. Sudden outflow of capital by speculators. 5. If investors' confidence in the stability of an economy is eroded, then they will try to get their money out of the country. This is referred to as capital flight. Once investors have sold their domestic-currency denominated investments, they convert those investments into foreign currency. This causes the exchange rate to get even have further impacted, resulting in a run on the currency. 6. Currency outflow will be there till the time reserves are getting finished. Speculators foresee this potential opportunity for a capital gain and compete against each other...
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...hypermarket is a mega-store, similar to that of a Wal-Mart. They started in small French towns, but by 1969 expanded to Belgium. In 1975, they opened their first store outside of the European continent, they had expanded to South America’s largest country, Brazil. Carrefour’s strategy until 1998 was to grow organically. But since 1998, its growth has been fueled by acquisitions of other retailers. Carrefour’s Financing Policy Analysis The risk that a business' operations or an investment's value will be affected by changes in exchange rates. Carrefour is exposed to exchange rate risk because of foreign-currency exposure from imported goods. This risk was being hedged through forward contracts. The €13.5 billion of debt on the Carrefour books is 97% hedged in Euro currency. Carrefour has a large exposure risk to the Euro because of their hedging policy. Questions from the Book 1. What is going on at carrefour? • Carrefour is expanding through acquisitions o This will require taking on debt • Current capital structure o Long-term debt ▪ 97% of foreign exchange rate risk hedged in Euros 2 . why does the eurobond market exist? (or, is plentiful debt capital not available domestically?) • Why does this market exist o Market was fueled by growth of multi-national firms o Able to reach global pool of investors • Debt is available domestically o Eurobonds can...
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...2007 November 2007, Vienna Hedging exchange rate risks Veronika Lammer How big is your exchange rate risk? ERSTE GROUP − What is the net currency risk? - Not only receivables, but also liabilities can bear exchange rate risks as well as inventories, other assets and financing. - Cross correlations between currencies have to be assessed. - Bulk of cash flows with different currency risks at different times have to be taken into account. - Price sensitivity of goods to exchange rate fluctuations. - In the end, the important figure is the influence of exchange rate fluctuations on profits, not on sales. CEEI November 2007, Vienna Hedging exchange rate risks 2 Reducing currency risk ERSTE GROUP − Is currency risk a problem for your company? − Could you reduce your currency risk by changing your suppliers or employing a different financing strategy? − Do you want to hedge your currency risk - all the time, or just sometimes? - to the full amount, or just partly? - You should define rules for hedging, especially if you decide to hedge only sometimes or partly. CEEI November 2007, Vienna Hedging exchange rate risks 3 Change Financing ERSTE GROUP − One relatively simple method of reducing your currency risk is to take a loan in the currency in which you have the highest amount of receivables. - You can pay off the loan directly with receivables. - This protects you from a longer-term downward trend in the currency of your receivables. - Interest...
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...Essay topic: why companies use currency derivatives? Currency derivative can be defined as a contract or financial agreement to exchange two currencies at a given rate or a contract whose value is derived from the rate of exchange of two currencies on spot (Shoup, 1998). Currency derivatives are developed and adopted to implement a strategy known as hedging, in which an organisation acquires a contract in order to offset an expected drop or rise in value of a position or future cash flow (Belk & Edelshain, 1997). This essay will outline the incentives and rationales behind an organisation that uses currency derivatives. There are three types of currency derivatives used in hedging, future contracts, forward contracts and options, although swaps are also commonly considered as a currency derivative (Shoup, 2008). These instruments are derived from a spot rate, which is the price of the “underlying currency” (Eiteman, Stonehill & Moffett, 2009). Options are normally more costly than future contracts and forward contracts, because options are rights rather than obligations to buy or sell a currency (gives buyers the right not to exercise the contract if the spot rate movement is not favourable) (Belk & Edelshain, 1997). Research in New Zealand indicates that 70% of currency derivative users used forwards, which are most prevalent currency derivative instrument (Chan, Gan & McGraw, 2003). This is possibly because forwards are easy to manage and understand and can be used in frequent...
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