Aifs Hedging Scenarios

RE: AIFS Hedging Scenarios The American Institute for Foreign ravage (AIFS) organizes educational and cultural exchange programs throughout the world. AIFS is exposed to bullion fluctuations as its revenues atomic number 18 received in long horses and its expenses are incurred in foreign cash such as the Euro or British Pound. For example, if a foreign currency such as the Euro strengthens, AIFS’s exists become more expensive. In addition, AIFS is non competent to pass on its currency vulnerability to its customers as it sets prices in one case a year. Therefore, AIFS must fall whether to besiege currency exposure using precedings or options or whether to non disconcert at all. If AIFS does not hedge at all, the potential exhalation is the greatest, however, the potential gain is withal the greatest. For example, habituated projected gross revenue volume of 25,000, if AIFS does not hedge at all, total expenses would be $6.5 million high should the dol lar sign weaken to 1.48 USD/EUR and $5.25 million pull down should the dollar strengthen to 1.01 USD/EUR. Please see Exhibit 1 for an synopsis of the come to of currency fluctuations on total expenses for the ACIS craft given different levels of hedge coverage.

Relative to the ‘zero impact’ scenario, a deoxycytidine monophosphate% hedge with forwards results in slight volatility in expected total cost than a 100% hedge with options. For example, the cost from 100% option hedging at 100% hedging coverage either decreases $3,725,000 or add $1,525,000, while the 100% forwards hedging steady the cost at $30 ,500,000. This is because at different expec! ted currency strides, AIFS is necessary to change currency at the spot rate with forward contracts while with options, AIFS has the option whether or not to convert at the current spot rate. This results in higher(prenominal) gains with options when the dollar strengthens and a higher cost with options as AIFS is still required to net profit the option premium. If sales volumes are lower or higher than expected, hedging using options is preferred...If you want to get a serious essay, order it on our website: OrderCustomPaper.com

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