A 1-page (single-spaced) brief on Hedging Currency Risks at AIFS
A 1-page (single-spaced) brief on Hedging Currency Risks at AIFS (attached). The brief should address the following questions: *What are the causes of the currency exposure at AIFS?
A 1-page (single-spaced) brief on Hedging Currency Risks at AIFS
A 1-page (single-spaced) brief on Hedging Currency Risks at AIFS (attached). You do not need to cite references to the case, only to any outside sources IF necessary
The brief should address the following questions:
Firstly, what are the causes of the currency exposure at AIFS?
Secondly, what would result if Archer-Lock and Tabaczynski did not hedge at all?
Lastly, what would happen with a 100% hedge with forwards?
A 100% hedge with options? Use the forecast final sales volume of 25,000 and analyze the possible outcomes relative to the ‘zero impact’ scenario described in the case (i.e. no change in the exchange rate).
*Given the choice of
(1) Do nothing — exchange at the spot rate;
(2) Use 100 % forwards;
(3) Use 100 % options, what do you think Archer-Lock and Tabaczynski should do?
Explain your reasoning.
The case is attached. Please let me know if you have any questions.
Thank you for your help.
More Details;
Currency risk is the financial risk that arises from potential changes in the exchange rate of one currency in relation to another.
And it’s not just those trading in the foreign exchange markets that are affecte d.
Adverse currency movements can often crush the returns of a portfolio with heavy international exposure,
or diminish the returns of an otherwise prosperous international business venture.
Companies that conduct business across borders are expose d to currency risk when income earne d abroad is converte d into the money of the domestic country,
and when payables are converted from the domestic currency to the foreign currency.
The currency swap market is one way to hedge that risk.
Currency swaps not only hedge against risk exposure associated with exchange rate fluctuations,
but they also ensure receipt of foreign monies and achieve better lending rates.,
How Currency Swaps Work
A currency swap is a financial instrument that involves the exchange of interest in one currency for the same in another currency.