Aspen Technology, Inc: Currency Hedging Review
This case is intended to analyze how a small, young firm's business strategy creates currency exposure and a need to manage this exposure. It is designed to explore the conflicting rationales for risk management and the measurement of exposures.
Case Study Questions
- Describe Aspen Technology's business strategy. How does it create a financing need and exchange rate exposures?
- Calculate Aspen's earnings AND cash flow exposures by currency for the past year. What currencies is it long or short? Describe any assumptions you’re making regarding Aspen's costs and revenues to calculate these exposures.
- Compare and contrast Aspen's earnings exposure and cash flow exposure to U.K. pounds. Do you notice something odd?
4. Compute Aspen's cash flow exposures in pounds with and without its existing hedging program. Do you notice something odd?
- Analyze whether and how the following factors affect Aspen's desire for risk management.
- Financial distress
- Investment programs; future growth opportunities
- The case writer, Peter Tufano, simulated the evolution of Aspen's earnings and cash flows, in the absence of a hedging, using the following steps (see a similar simulation in Excel, using the Gaussian copula). Specifically, he:
- Assumed that all local currency revenues and expenses are fixed.
- Used the spot rates given in Exhibit 5 as the initial conditions
- Each month, new rates were drawn using the distribution of monthly exchange rate changes given in Exhibit 4. He used the correlations given in Exhibit 4 c) to tie the rate to changes to one another. In other words, the rate changes are not independent of each other.
- For each year, he computed average exchange rates from the monthly exchange rates for each currency. He assumed that Aspen's sales are relatively constant over time; in reality they could be quite lumpy.
- He computed Aspen's cash flows and pretax earnings, assuming that local sales and expenses are fixed, in dollars.
- He repeated each simulation 1000 times to obtain a distribution of future earnings and cash flows.
Discuss whether the risks evident in this simulation pose any operational problems for Aspen. In the absence of a hedging program, do you think the risk in earnings and cash flow is too great for Aspen or tolerable? Based on this information and the other information in the case, what goal would you recommend for the firm's currency risk management program? Why? Based on your goal, what type of exposure should Aspen be measuring?
- Read the Chevron article from the Wall Street Journal. This article discusses considerations in currency risk management beyond those mentioned in this case. After reading this article, what other information about Aspen’s business would you like to collect in order to refine your currency risk management strategy for the company?
Summary: This question is related to a case study on Aspen Technology Inc: Currency Hedging Review and analyzes how a small, young firm's business strategy creates currency exposure and a need to manage this exposure.
Total word count: 1690
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