Hedging Currency Risks at AIFS - Tabaczynski’s Spreadsheet - International Finance Assessment Answer

International Finance Assessment Answer

1. Briefly describe the overall business model of American Institute for Foreign Study (AIFS). Draw a simple diagram that connects the firm, the customers, and the suppliers.
2. As of July 2004, American Institute for Foreign Study (AIFS) hedge all its costs. Make a case (without any calculations) to CFO, Becky Tabaczynski, that  a) hedging all its costs may not be an optimal strategy for the corporation. b) an option hedge makes a better choice than forward contracts for hedging. Would Becky Tabaczynski agree with your thought process?  
3. Assume that you are the CFO of AIFS and is considering going public and issuing equity in the New York Stock Exchange (NYSE).  a) What is your primary social responsibility if your firm goes public? b) AIFS is thinking about making an investment in New Zealand. AIFS venturing into New Zealand may result in the loss of employment for some hard-working local employees (there will be a shift in some jobs overseas). How will this information affect your decision making?

4. Using the above information a) What is the total projected costs (for all three scenarios) in dollars at the current exchange rate?  b) What are the total costs (for all three scenarios) if you use a forward contract to hedge? c) What is the total option premium for each scenario?   5. As the CFO, you decided not to hedge. Assuming expected final sales volume is 30,000, what are your total costs a) if the exchange rate remains at $1.16/€? Let’s call this the baseline scenario.  b) if the exchange rate will be $1.25/€? How does this compare to the baseline case? c) if the exchange rate will be $1.08/€? How does this compare to the baseline case?
5. As the CFO, you decided to hedge using forward contracts. Assume that the expected final sales volume is 30,000. What are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)  a) if the exchange rate remains at $1.16/€? b) if the exchange rate will be $1.25/€? c) if the exchange rate will be $1.08/€?
6. As the CFO, you decided to hedge using option contracts. Assuming expected final sales volume is 30,000, what are your total benefit/cost and the percentage benefit/cost from hedging (compared to no hedging)  a) if the exchange rate remains at $1.16/€? b) if the exchange rate will be $1.25/€? c) if the exchange rate will be $1.08/€?
7. What is the most profitable strategy for the case in which the expected final sales volume is 30,000 (no hedge, forward contract, or option contract) a) if the exchange rate remains at $1.16/€?  b) if the exchange rate will be $1.25/€? c) if the exchange rate will be $1.08/€? d) Is there a best strategy? Why?

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