The case provides an introduction to how currency mismatches create exposures, why companies hedge those exposures and how they hedge those exposures. In short, the case forces you to decide if to hedge, how much to hedge, and what instruments to use to hedge.
1. Identify the sources of exposures to exchange rate fluctuations and why companies choose to manage these risks.
2. Consider the use of different instruments in hedging foreign exchange exposures
3. Evaluate different hedging strategies in the presence of volume uncertainty
4. Consider what outcomes should be hedged against.
Assignment Questions:
1. What gives rise to currency exposure at AIFS?
2. What would happen if Archer-Lock and Tabaczynski did not hedge at all?
3. 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 "zero impact" scenario described in the case.
4. What happens if sales voumes are lower or higher than expected as outlined at the end of the case?
5. What hedging decision would you advocate?