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Hedging Currency Risk

In: Business and Management

Submitted By mmcoughe
Words 1834
Pages 8
The American Institute for Foreign Study (AIFS) is an organization, which helps enable American students to travel abroad. The main service AIFS provides entails organizing educational and cultural exchange problems across the globe. As the case explains, AIFS has split their business into two major divisions that that serve American student’s studying abroad; the Study Abroad College division and the High School Travel division. The college division, which is controlled by Christopher Archer-Lock, sends American students all over the world on 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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