1) AIFS - There are several factors that give rise to currency exposure at AIFS. One of these is the fact that most of their revenues are denominated in USD ($) but most of the expenses they incur are in foreign currencies (mainly Euros and British Pounds). One of the reasons AIFS hedges currency is to protect themselves from changing foreign exchange rates. This also protects them from one of their 3 major types of risk – the bottom line risk, or the risk that foreign exchange rates could increase the firm’s cost base. The second type of risk AIFS encountered was sales volume risk. Since currency is traded based on projected sales, the actual sales amount at the end of the financial period could vary from the projections and a lower actual sales volume could be very damaging to AIFS financially. The third type of risk AIFS tries to hedge against is competitive pricing risk. This means regardless of how the exchange rates arep fluctuating, AIFS could not transfer rate changes into an increase in their price. Since AIFS does their banking with 6 different institutions, and maintains good, close relationships with each, AIFS is able to hedge with their lines of credit for each bank, rather than depositing funds in these banks to complete the transactions. This saves AIFS in transaction costs and the number of transactions since the banks know and trust them. The ultimate success of the hedging activities is determined by the final sales volume and the fair market value of the USD ($).
2) If Archer-Lock and Tabacynzski did not hedge at all, it would mean they are fully exposed to currency risk. Fluctuations in the exchange rate can heavily impact revenues and expenses in either good or bad ways. For AIFS, if their revenues drastically drop and their expenses rise, this could mean big trouble for the firm as a going-concern. More specifically, in their case, if the