AIFS organizes academic and cultural exchanges for students, sending over 50,000 American students abroad each year for study programs and tours. Revenues are largely in U.S. dollars while costs are largely in Euros. AIFS sets prices for the programs months in advance and guarantees its prices once they are published in catalogs. Please answer the following questions regarding AIFS’s currency exposure. Please type your answer and be as precise as you can.
1. What gives rise to the currency exposure at AIFS? (5 marks)
2. What would happen if Archer-Lock and Tabaczynski did not hedge at all? (5 marks)
3. What would happen with 100% hedge with forwards? A 100% hedge with options? Use the forecast final sales volume of 25,000 and analyze the possible outcomes relative to the ‘zero-impact’ scenario described in the case. (10 marks)
4. What happens if sales volumes are lower or higher than expected as outlined at the end of the case? (5 marks)
5. What hedge decision would you advocate? (5 marks)