Aspen Technology, Inc., Case Study Example

What are aspen’s main exchange rate exposures? how does aspen’s business strategy lead to these exposures as well as to the firm’s financing need ?

Answer: Based on the exhibit 5, the majority of current sales of yen (U.S. $ 3282/US $ 26,685) = 12.3%.

Expense of U.S. $ 4400 / $ US52351 = 7%.

UK pounds which amounted to: current sales: U.S. $ 2722/US $ 26,685 = 10.2%.

Expense amount: U.S. $ 4940/52531 = 9.4%.

So Aspen Technology would focus on Yen and UK Pounds currency.Aspen’s strategy would be to use Cross Currency and interest rate swaps. In this case the hedge contract with GE and Sanwa would be their best strategies.

Calculate aspen’s exposures by currencyfor the past year. What currencies is it long and short ? 3. How does aspen hedge these exposures?

Where in it depends on the interest rate, forward exhange rate and contractual spread. Cross Currency:

Answer: Based on the exhibit 5, the majority of current sales of yen (U.S. $ 3282/US $ 26,685) = 12.3%.

Expense of U.S. $ 4400 / $ US52351 = 7%. Also UK pounds which amounted to: current sales: U.S. $ 2722/US $ 26,685 = 10.2%.

Expensen amount: U.S. $ 4940/52531 = 9.4%. So Aspen Technology focuses on Yen and.

A long position is made when the trader buys a currency. The long position is made by the investor if he expects the currency to later rise in value. If that happens, he will be able to sell the currency he bought for a higher price than what he paid for it. In this case, the trader can benefit from a market that is on the rise.

An example of a long position is given for the USD/JPY currency quote worth 114.34 / 38. The long position will be done for 114.38, meaning the asking price.

A currency trading short position is maintained when a trader sells a currency in the expectation that it will depreciate in value. Contrary to common sense, for this trade the investor wants the currency to drop, and only then willthey make a profit.

How does aspen hedge these exposures?

Aspen’s current hedging policies of using forward contracts and selling foreign currency receivables are simple and adopt an attitude of zero exposure to foreign exchange risk. The forward contract is the most commonly used hedging instrument in the world. It involves booking a foreign currency deal in the future at a rate that is calculated keeping in mind interest rate differentials or swap points and therefore discounts foreign exchange rate risk in the future. Aspen usually negotiates one or two year forward contracts in its hedging policies. The other strategy involves selling receivables to specialized companies. Since most of its sales are done with partial payment selling receivables at a price which takes into effect foreign exchange rate fluctuations prevent the company from being exposed to foreign exchange risk should they fall. Aspen’s current policy is safe and shows a very low risk appetite

What goal would you recommend for the firm’s currency risk management program? why? base on your goal, what type of Exposure should Aspen be measuring?

Aspen’s current strategies involve managing sales related foreign currency exposures but its expense related foreign currency exposures still remain unmanaged. I would recommend that they  the adopt strategies that take into account their own exposure to foreign exchange risk when dealing with foreign suppliers who provide raw materials needed to produce the product. I would also recommend that the company experiment with other types of hedging products available in the market like the various kinds of future foreign exchange options recommended by the bank advisors. These include plain vanilla options knockout options. Options require a greater risk appetite than future contracts. They also involve the chance of making greater profits for the company. I would personally recommend that if Aspen does not want to increase the risk component in their portfolio interest rate swaps etc. they should choose to trade in interest rate swaps a money market instrument which seeks to hedge foreign exchange risk based on interest rate differentials.  Another money market instrument that can be used for hedging and carries a lesser amount of risk than options is foreign currency money-market borrowing. This involvesborrowing in the money market, with the loan denominated in a currency other than the U.S. dollar. The interest differential in the two currencies would cover the foreign exchange exposure that results from foreign sales. Aspen has always been measuring foreign exchange exposure that it incurs from selling its products in a foreign currency or in a foreign market. In the new strategy it will now also be measuring the foreign exchange exposure that it incurs when buying raw materials from foreign buyers using foreign currency.

Should the firm maintain its policy of completely eliminating all exposure on booked sales? if not, what policy would you advocate and why ?

The firm’s policy on foreign exchange risk management currently adopts a very conservative approach with zero risk tolerance and that is the reason for the emphasis on eliminating all exposure on booked sales. I personally feel it should continue with this policy. It should supplement this policy with a new strategy of adopting hedging policies to protect against foreign exchange exposure that it incurs when buying raw materials from foreign buyers using foreign currency. This would offer it complete protection against foreign exchange risk in all its forms and that would actually result in a bolstered profit margin. I don’t advocate a shift in this particular policy it is important to protect the company against volatile and often extremely damaging fluctuations in the foreign exchange markets. In fact I advocate that the company makes this coverage more comprehensive

How, if at all, should Aspen’s recent transition from a private to a publicly-traded firm affect its approach to risk management?

Now that Aspen is a publicly trade firm it has more capital available at its disposable. However it is also more accountable for this capital to shareholders. I would re-emphasize that it is important to protect against foreign exchange exposure and that the company should supplement its existing hedging strategies with new one. I am not advocating that the company experiment with shareholders money in investing in risky foreign exchange deals and do margin trading. However what I do advocate is that the company does take a calculated risk on hedging instruments like interest rate swaps and plain vanilla options that would offer it greater protection as well as higher return on its investment. I am also suggesting a more open minded approach to hedging which considers the pros and cons of all the various options available as well as an emphasis on more comprehensive coverage against foreign exchange risk.

For a large move in the exchange rate, one could ask how much cash flow exposure Aspen will face. To answer this question, we could compute Value-at-Risk for Aspen’s cash flows using information in Exhibit 4(B).

Since the Mean, standard deviation, and percentile rankings of month-to-month percentage changes in average monthly foreign exchange rates and the corresponding year-to-year percentage changes in average yearly foreign exchange rates were 10.8%,19.0%, 19.2%, 15.4%, and 6.7%.

The corresponding yearly numbers were -12.5%, -6.3%, -6.9%, -6.1%, and -6.1%.

We would then find the Value-at Risk by using the The Variance-Covariance Method

This method assumes that stock returns are normally distributed. In other words, it requires that we estimate only two factors – an expected (or average) return and a standard deviation – which allow us to plot a normal distribution curve. The idea behind the variance-covariance is similar to the ideas behind the historical method – except that we use the familiar curve instead of actual data. The advantage of the normal curve is that we automatically know where the worst 5% and 1% lie on the curve. They are a function of our desired confidence and the standard deviation