Aspen Technology, Inc.: Currency Hedging Review case study deals with a software firm that sells its process-control software to industrial users around the globe acquired a subsidiary in the United Kingdom. Due to such acquisition and other changes in the firm's business, including the increasing overseas expenses and its recent initial public offering, the chief financial officer of this rapidly growing U.S.-based software firm must review the goals, strategies, and policies of the firm's currency hedging program.
Peter Tufano, Cameron Poetzscher
Harvard Business School (296027-PDF-ENG)
Oct 10, 1995 (Revision: Jul 18, 1996)
Case questions answered:
- What are Aspen Technology’s 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?
- Should Aspen Technology practice risk management? Why? Support your answers by using data from the case and provide an estimate for the potential impact of risk management on the firm.
- Calculate Aspen’s exposures by currency for the past year. What currencies is it long and short?
- What goal would you recommend for the firm’s currency risk management program? Why? Based on your goal, what type of exposure should Aspen measure?
- Should the firm maintain its policy of completely eliminating all exposure on booked sales? If not, what policy would you advocate and why?
- How, if at all, should the recent transition of Aspen Technology from a private to a publicly-traded firm affect its approach to risk management?
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Case answers for Aspen Technology, Inc.: Currency Hedging Review
What are Aspen Technology’s 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?
Aspen Technology Inc. is a highly international company that sells its specialized engineering software in more than 30 countries. It accounts for 52% of revenues outside the United States and employs a total of 417 workers, of which 152 come from abroad. More specifically, its revenue structure is subdivided into 4 major categories: with the U.S. accounting for 48% of revenues, Europe 31%, Asia 12% and other countries for 9%.
As such, it is no surprise that a company of its sort in a highly globalized economy would be exposed to considerable amounts of exchange rate risk. To this day, AspenTech’s main currency exposures are in German Marks, British Pounds, Japanese Yens and Belgian Francs.
Aspen Technology gives rise to these currency exposures by generating revenues in foreign countries and by operating foreign subsidiaries. Amongst its foreign subsidiaries, there are offices in London (deriving from AspenTech’s purchase of Prosys Technology in 1991), its foreign sales subsidiaries in the UK, Japan, Hong Kong, and Brussels, and its JV with China’s petroleum and petrochemical company for its operations in China. AspenTech counts 16 offices worldwide. Overall, AspenTech’s policy of selling in foreign currencies is appropriate as it tends to increase foreign sales.
More specifically, on the revenue side of its operations, the exposure of Aspen Technology to exchange rate risks is a consequence of the financing it grants customers when they enter licensing agreements with the company. In fact, since the annual license for one of AspenTech’s core products is rather expensive (in the range of $ 10,000 to $ 25,000) and conditional to 3 to 5 year fixed contracts, AspenTech’s envisaged a financing policy. As many as 90% of customers would avail themselves of such arrangements. Such financing however (susceptible to a 12% interest rate), would give rise to future cash flows in foreign currencies…