Hedging Currency Risks at AIFS Essay

1. The final gross revenue great deal and the final one sawbuck bill rallying run gives rise to the bills flick risk. Prices are set 1 social class ahead of time so whatever variant in the transfer roam lead potentially cause a loss or savings to AIFS when the coin is alternated.2. If the commuting pass judgment remains never-ending at $1.22/euros then AIFS go out not incur a loss or a gain. It would cost $1220 per participant at this deepen outrank. If actual dollar be were above this level, then there would be a negative impact. If actual dollar costs were move than pass judgment, the impact would be positive. Thus, with a gross gross revenue volume of 25,000 participants and the transposition respect rises to $1.48/euros then AIFS will be subject to a loss of $4,391,892. If the exchange rate drops to $1.01/euros then AIFS will besides $5,198,020.3. With a 100% precedent duck under a final gross revenue volume of 25,000 participants, AIFS is facing a dollar inflow of $25,000,000. Under this assumption, the optimal meat of expenses would be 1000 Euros per student. Risk arises when currency evaluate between the Euro and the dollar fluctuate. From the European perspective, there is 25 one million million Euros in underlying exposure. If 25 million Euros were bought send on at the 1.22 $/euro rate, then 30.5 million dollars will be sold. If the contract was signed in June 2004, then 1 year 30.5 million dollars bear be spent for 25 million Euros, leaving a light up position of 0 Euros and 30.5 million dollars (100% forward hedge). With this forward hedge, AIFS is completely mitigating the exchange rate risk between the dollar and the Euro, and are thus protected from losing bills if the exchange rate approaches 1.48$/Euro. With a 100% extract hedge,4. The higher or lower sales volume would exaggerate whatever gains or losses AIFS will realize. We are competent to utilize the AIFS shifting box to examine what the reactions to differing sales volume versus the exchange rate. If the volume is low and the exchange rate is expose of the money, the loss will be lower than if the volume was the same as projected. With alower sales volume still in the money interest rate the gain would be realized, until now again it would be smaller than the gain with the expected 25,000 participant value.For a higher sales volume and out of the money exchange rate the loss would be the highest possible, which can be hedged by utilize an excerption. If the sales volume is high and the rate is in the money, this would be the highest possible gain, however it would also require AIFS to secure to a greater extent currency. This is both good and bad news, because the exchange rate could be out of the money by the time AIFS is able to buy more currency. However if the exchange rate was in the money this preference would be the best possible situation, creating the highest revenues of all possibilities.5. The resource he dge dodge would be the indemnity we would advocate because AIFS purchases foreign currency ground on the projected sales volumes. The option strategy provides the best protection from the fluctuation in both exchange rates and sales volumes. We believe that due to the intentness in which AIFS operates, the company is more possible to experience higher fluctuations in sales volumes than in the exchange rates. The option strategy provides a more versatile option to hedge against this potential risk because AIFS will not be locked into a special rate, as is the case with forward hedges.