The American Institute for Foreign Study
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The American Institute for Foreign Study (AIFS) is a company that specializes in providing educational and cultural exchange programs for college and high school students. The firms revenues are mainly in U.S. dollars, but most of its costs are in euros and British pounds, giving rise to currency exposure. Overall the company provides services to approximately 50,000 students each year, and has revenues of about $200,000,000. The College division (CSS) had about 5,000 students, was more profitable, and its profits were less susceptible to overseas political instability. The High School Travel Division (ACIS) had 20,000 students, was less profitable, but had a greater volume of students.
AIFS sets guaranteed prices for its exchanges and tours a year in advance, before its final sales figures are known. The controllers need to ensure that the company adequately hedges its foreign exchange exposure and achieves an appropriate balance between forward contracts and currency options. Currency hedging helped AIFS protect its bottom line from damaging exchange rate changes and was used to manage three types of risk: bottom-line risk, volume risk and competitive pricing risk. Since currency is traded based on projected sales, the actual sales amount at the end of the financial period could vary from the projections and a lower actual sales volume could be very damaging to AIFS financially. Since AIFS does their banking with 6 different institutions, and maintains good relationships with each, AIFS is able to hedge with their lines of credit for each bank. This saves AIFS in transaction costs and the number of transactions. The ultimate success of the hedging activities is determined by the final sales volume and the fair market value of the USD. AIFS needs to evaluate the uncertainties it faces and determine the goals of their hedging program.