More Essay Examples on Currency Rubric Currency exposure or currency risk is the type of risk that an individual or a company faces due to the fluctuation in price of one currency against another. For AIFS —a student exchange organization that offers education and travel programs all over the world- the fact that they do business domestically and internationally gives rise to several factors that exposes them to currency risk. Their business operations give way to another factor that accentuates their currency exposure. This policy states that regardless of how the currencies fluctuate, positively or negatively, the company cannot modify their current catalogue prices.
This thesis examines currency hedging from three perspectives: The thesis starts that with analyzing rationale and supporting empirical evidence on why companies should hedge and how it impacts firm value.
It is a highly debated topic whether hedging increase firm value and the empirical evidence is not conclusive.
Second, I review practical guidelines and measures that companies can use to improve their currency risk management programs. These guidelines and measures include 1 profile all risks surrounding the company, 2 hedge only what matters, 3 choose a hedging strategy that accomplishes the company's hedging objectives, 4 understand the total cost of the hedging program, 5 increase accuracy of cash flow forecasting, and6 look beyond financial hedges.
These are very practical approaches and can be done with little pain, relatively low cost and fairly short order. The last part of the thesis is the empirical case study. The case study was conducted by back-testing three distinct hedging strategies: The testing is conducted with Company X's Russian ruble-denominated cash flow data from to The objective was to find an optimal hedging strategy to hedge this exposure and discuss the necessity of hedging this exposure in the first place.
The performance of these strategies is evaluated from two perspectives: The results indicate that hedging would have been profitable during the study's time period with every strategy generating a positive result.
The positive results were primarily driven by the extreme weakening of ruble in and Forward contracts outperformed the option strategies in both economic results as well as in reducing unexpected negative results. It's was also noticeable that the cost of hedging was significantly high, especially for the FX options due to the interest rate differential and volatility.
Based on the results, I would recommend considering not to hedge the ruble exposure due to the high cost of hedging in the prevailing environment. The Russian business represents only percents of the total revenue and the ruble cash flow does not pose a risk to the case company's financial health nor strategic plans.
Permanent link to this item:This section provides the list of readings for each lecture session, course notes, and information on topics and cases covered. In case of a % hedge with contracts, Archer-Lock and Tabaczynski will have to lock the currency rate at USD/EUR.
As a result no matter what will be the currency rate in the future, they will have USD for each Euro.
The case examines transactional and translational exposures and alternative responses to these exposures by analyzing two specific hedging decisions by General Motors.
Describes General Motors' corporate hedging policies, its risk management structure, and how accounting rules impact hedging . Hedging Currency Risk at AIFS. Case Synopsis: The American Institute for Foreign Study (AIFS) is a student exchange organization based in London. Through its companies, AIFS is responsible for sending 50, students on international exchanges annually with yearly revenues of about $, Hedging exchange risk is a strategy that should be considered during periods of unusual currency volatility.
Because of their investor-friendly features, currency ETFs are ideal hedging. FX Risk Hedging at EADS In , EADS, the ecu aerospace group that is the owner of Airbus, was confronted with the choice of methods better to hedge a sizable and growing mismatch between its dollar revenues and it is euro manufacturing costs.