Currency hedging simply means to the control cost of foreign exchange in future. The AIFS used currency hedging to protect its bottom line from damaging their exchange rates in relation to the American students sent abroad for their studies. The AIFS did this two years in advance basing this on the expected cost they should cover and the proportion it should have used to forward contracts and options. AIFS also deals with business activities. In this, it sends its students abroad for academic and cultural exchange programs. These trips exposed the students to foreign countries in which foreign exchange rate was required. The ACIS were also exposed to world events. The word war, political instabilities and the drop in sales were factors that were to affect the students while abroad. The AIFS had to factor in all these variables during its currency risk hedging process (Dessai, Dessain, Anders, 2007).
On arranging for the trip by young people to America who were to come and assist with child care, AIFS said that there should be no price surprising as it took into account the cost base, the competitive pricing and also the hedging activities. In the year 2004, the Archer-Lock had just finalized the prices for the college divisions that it cataloged for the summer 2005 and 2006. The managers discussed the sales forecasts and the events that might affect the sales.
For the AIFS in controlling the price cost, it had to raise the prices by smaller amounts in each year. With competition, this was not a big surprise as it had no adverse effect due to strong based customers. All these were in connection to the hedging currency risk for high school travel pricing combining tours and seasons and departure gateways. Tabacznski and Archer-lock helped the AIFS in this currency hedging so as to manage the following three kinds of risks: Firstly, it was the bottom-line risk, second was the volume risk since the foreign currency was bought based on the projected sales volume, and thirdly was the competitive pricing risk since no matter how the currency fluctuated, the AIFS price guarantee meant it could not be able to transfer rate changes into price increases (Brian, 2000).
The hedging activities normally started six months before the pricing date. The Archer-lock report on this indicated that the currency rates and their hedging activities affected many aspects of their business. It also provided the long term and short term market rates. Hedging Currency Risks at AIFS were also monitored in the light of sales and enrollment projections, market rates, currency policy and timing within the business cycle.
Archer-Lock on its monthly report made recommendations for the future hedging. When buying the currency, AIFS dealt with six different banks with a long standing relationship in them. Without the lines of credit, AIFS would have had to deposit at each given bank to make a cover of its hedging activities. The final group’s success on the hedging activities depended on the last sales volume and the final USD market value.
The AIFS unfortunately had to buy the currency at a higher rate than the price quoted in the catalog. To help inform its hedging decision, it had put in place a good strategic and management authority to consider and put in places all policies that could assist the advancement in this currency sector. The most influential and crucial motivating factor facilitating expansion and realization of goals in hedging is the relationship in the enhancement across the board of management which is an important tool to achieve efficiency (Deasi, Dessain, Anders, 2007).
Reference
Desai Mihir, Dessain Vincent & Anders Sjoman (2007) Hedging Currency at AIFS.
Brian Coyle (2000) Hedging Currency Exposures: Currency Risk Management. London, Lessons Professional Publishing
