Students assume the role of CFO and use various hedging strategies to mitigate the risks of foreign exchange
Corporations operating in a global economy face currency risks that stem from fluctuating exchange rates. When a company’s sales currency differs from its cost currency, profit margins can be impacted by volatile exchange rates that cause, for example, differences between the settlement price of a resource and the ultimate invoice price. To minimize and protect against such risks, many firms hedge, counterbalancing one transaction against another.
Wharton’s International Exposure Management and Valuation (IEMAV) simulation puts students in the role of an international Chief Financial Officer and presents them with multiple scenarios, each highlighting a different source of cash flow currency risk. For each scenario, the student (or group of students) receives background information about a company and the specific risks faced. Using equations, sample exchange rates, or historical data (depending on the scenario), participants determine how to use the available hedging tools.
Because the exercises are complex, IEMAV provides students with an opportunity to submit practice strategies and review the results before uploading their final answers.
IEMAV contains several scenarios that allow students to learn the intricacies of mitigating foreign currency risks. Though the simulation’s interface varies slightly from scenario to scenario, there are several common elements.
- Description/Scenario — the detailed information about a company and a specific transaction that involves currency risk. In addition, this paragraph describes the available hedging tools. The purpose of this section is to provide students with a real-world context for their decisions.
- Equation — the equations required for students to make a sound hedging decision.
- Data — any supplemental information that will be useful to participants. The information provided varies by scenario (e.g., sample distribution of exchange rate, historical data).
- Input area — the area that captures students’ hedging decisions and parameters.
Students have the opportunity to practice their hedging strategies for each scenario by entering parameters and viewing the results.
IEMAV contains administrative tools for both students and instructors.
For students, IEMAV offers an electronic invitation system to facilitate the creation of class groups. In addition, students can communicate via an online forum embedded within the application.
The IEMAV instructor interface allows instructors to edit their scenario descriptions, retrieve uploaded student assignments, and access teaching tools that facilitate in-class discussion.