Executive Summary
Aspen has become a public company with more risk adverse investors who want to invest in the core business of the firm and not assume any foreign exchange risk. Foreign exchange risk is a core risk to Aspen’s business because they have many customers outside of the United States. We believe that transferring this risk to the customers would limit Aspen’s growth on the foreign markets: Aspen should keep its current marketing strategy, which includes credit installment payments and payments in local currencies for Japan, the UK and Germany. The current risk management program hurts the company because it doesnot consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that …show more content…
But, 3rd, 4th and 5th years of sales are not perfectly hedged because Aspen uses series of 1-year forward currency agreements. When swapping to new 1-year forward contracts, Aspen is exposed to a foreign exchange risk. Aspen’s current hedging strategy hurts them because they don’t hedge their total exposure (after cancelling out the natural hedging exposures) appropriately: the Belgian Franc that accounts for 54% of their exposure is not hedged at all, whereas the Japanese Yen and the UK pound are “overhedged”, and then Aspen pays more and not efficiently.
Aspen’s accounting choice is to recognize sales revenue arising from license fees at the time of sale (upon shipment of the software) because contracts are not cancellable. The revenues recognized do not include the portion for the future maintenance and the service obligations, which are capitalized. Aspen recognizes the interest and principals revenue collected with their financing plan each year: annual installments are made over the term of the license. However, Aspen has an operating cash shortfall because cash payments are deferred over the contract’s period (3 to 5 years), causing a large receivables’ account in the balance sheet. Aspen sells part of its receivables to financial intermediaries to collect cash more