Aspen Case Study
What are Aspen Technology main exchange rate exposures? How does Aspen Tech’s business strategy give rise to these exposures as well as to the firm’s financing need? The main exchange rates exposures are: British pounds, Deutsche Mark, Japanese Yen and Belgian Francs. Aspen faces foreign currency risks due to sales and expenses in those foreign currencies. Expenses include R&D costs (20% of overall R&D are in UK), headquarters, sell force etc. D represent 52% of Aspen expenses.
If Aspen sells its products in local currency, It’s because its clients need to plan their P and don’t want to see their expenses fluctuate with the currency change. Besides, Aspen grants deferred payment for 5 years, impacting heavily their working capital. They can afford to grant 5 years receivable because their clients are highly rated multinational, which cannot cancel the payment (that carry a huge financing spread) and the market’s demand is inelastic.
The market is looking for high quality product: tit two years development needed to get a customized software, the switching costs is very high and benefits to Aspen (90% of Its clients re-conduct their contracts). However, Aspen succeed to finance Its need by selling Its receivables to two financial Institutions – guarantying a hedge to the currency – depending on the nature of the receivable (where it comes from, the amount etc.
). Aspen hedge all its receivable and do not use any natural hedge (compensating expenses and sells in a local currency).
We also have to point out that the currencies have a high volatility, without being related, which benefits to Aspen (they diversify their risks! ). 2) Calculate Aspen’s exposures by currency for the past year. What currencies Is It long and short? (Based on Exhibit 5) CURRENCY Sales (in k$) Operating Expenses (in k$) Net exposure (k$) Long/Short 5.
865 4. 771 1094 LONG 1. 466 982 Belgian Francs 5. 153 -5153 SHORT 7. 072 4. 406 2666 Other 517 322 195 In E, Aspen is in LONG position because the company will benefit if E appreciate.
Per contra, the Belgian Francs is in SHORT position: the company will loose money if Belgian Francs appreciate. ) What goal would you recommend for the firm’s currency risk management program? Why? Based on your goal, what types of exposure should Aspen be measuring? The company has to hedge its cash flow when it is in financial distress. When looking at their account figures, we can’t see any progressive corporate taxes and the R&D doesn’t weight enough to say Aspen is in financial distress. Furthermore, the company doesn’t risk any default costs. There are no real arguments here to take into account the need of hedging cash flows.
Nevertheless, the company Aspen needs to hedge its account. Indeed, they are in the case of economic distress: they care about their image (they need to show their robustness to their customers), they want to show the stability of the company (smoothing the account figures rather than the cash flow), and even if they need cash, they want to avoid any impact to the clients. 4) Should the firm maintain its policy of completely eliminating all exposure on booked sales? If not, what policy would you advocate and why?
