“In general, I believe that in the long run, no matter how you hedge, half the time you win, half the time you lose”. Given this quote by Mrs. Tabaczynski, the CFO of the group’s high school travel division, ACIS, we have based our analysis on this concept. Without regard to speculation, we have concluded that it is in our best interest to hedge equally in options and forwards at a 90% cover on an expected volume of 25,000 participants.
We began the first part of our analysis by creating an excel model that establishes the profits made with three various US$/Euro exchange rates (1.01 $/€, 1.22 $/€, 1.48 $/€). The model displays a range of covered percentages based on an expected volume of 25,000 participants during the year. The model also includes a best case scenario of 30,000 participants and a worst case scenario of 10,000 participants to help understand the effects on profit if volume exceeds, or does not meet the expected level. Another important feature included in the model is the manipulation of hedging allocation between forward and option contracts. As shown in our appendix, we have highlighted the 80-90% covered region because we feel as though it is the most effective, efficient, and safest way to hedge, creating the most stable position for AIFS.
The calculation of the net margin takes into account the profits made on the forward contracts, profit made on the option contracts, and accounts for the money spent on premiums for the options. In analyzing the ranges of expected margins we were able to identify the levels of coverage that resulted in the least amount of variance given the different exchange rates. We found that smaller ranges in margins allowed for more accurate forecasting. Additionally, we included the cost of options as a percentage of the margin so that we could easily understand how much of our profit would be used to pay the option premiums.
We have determined that our...