Aifs Case Essay

398 Words2 Pages
AIFS Case FIN 411 April 1, 2013 1.) If AIFS decided to choose a 100% forward hedge, the actual costs in dollars will not change based on the changes in the exchange rate. The cash flows from the forward hedge in Euros are always equal to the underlying expenses in Euros. Furthermore, the actual costs in dollars are equal to the cash flows from shorting dollars. The forward hedge has zero impact when the exchange rate remains the same, so the actual costs in dollars would be exactly the same when using no hedge at all. 2.) If AIFS decided to choose a 100% option hedge, their costs would be lower, measured in dollars, if the exchange rate remained the same. The only time that the option hedge would be the best choice is when the dollar is weak. We would not hedge using an option until the dollar got weaker. Even though the dollar got weaker with the hedge, we were actually able to keep the actual costs the same; therefore, we would exercise the 100% option hedge even when the option hedge changed with a weaker dollar due to the costs becoming lower. 3.) If expenses were decreased to approximately 10,000,000 Euros, the zero impact scenario would occur using a forward hedge if the exchange rate was to remain the same. This forward hedge would now have a positive impact whenever the dollar is weaker. Given the same expense situation, using the option hedge, there would be no benefit due to the option premium. The option hedge is only beneficial whenever the option hedge is weaker. Due to the option premium, there is no zero impact scenario. 4.) If expenses were increased to approximately 30,000,000 Euros, the zero impact scenario still occurs using a forward hedge at the forward exchange rate. Using both hedges, AIFS benefits from a weaker dollar. 5.) In the immediate future, 100% forward hedge would benefit AIFS; however, in the long
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