Aspen Tech

Case Western Reserve University |
|

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 customerswould 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 does not consider Aspen’s expenses abroad that balance sales exposures to currency fluctuations. We then recommend that Aspenhedge completely its exposure but after “natural hedging”, which we recommend increasing thanks to the larger financial capacities allowed by its IPO. Using options for aggregated positions (by estimating yearly sales per currency), rather than having multiple forwards contracts, seems reasonable because it would enable the company to benefit from good moves in the currency exchange rates, to payless in transaction costs because of the larger amounts and at the same time use its current human resources (limited hedging skills) by avoiding complex, expensive products.
Business and Marketing Strategy
Aspen Tech’s business strategy and marketing strategy create financing needs due to the position Aspen puts itself in with its customers. Aspen allows installment payments that hurt thecompany’s cash flows and in turn require financing to generate enough cash flow to pay for Aspen’s annual expenses. This business model causes Aspen to expose itself to foreign exchange risk because many of those account receivables are with foreign firms. In this way, Aspen has both accounting risk exposure and cash flow risk exposure.
The accounting risk exposure occurs because these accountreceivables may not be worth as much USD when finally paid in full than when they were originally recorded on Aspen’s books. Because Aspen allows customers to make installment payments, Aspen risks not receiving all of its cash from customers in the long-run, while in the short-run having little cash in its own hands, exposing itself to cash flow risk. Despite the many risks Aspen has, we believe thatcontinuing with their current accounting strategy is in Aspen’s best interest, although we suggest modifying their current hedging activities by using different financial contract hedges.
Foreign exchange risk is a core risk to Aspen’s business because they are a multinational company with many customers outside of the United States. Aspen faces many risks in their business, such as the cashflow risk brought by installment sales, and due to these installment sales with customers outside of the U.S., they will always face foreign exchange risk exposure. Aspen could lessen its foreign exchange risk, but this as stated above would probably hurt its business. If Aspen keeps its current strategy as we suggest, foreign exchange risk will continue to be one of its largest core risks.
Webelieve that Aspen should take steps to reduce their accounting risk exposure and foreign exchange rate exposure by using more financial contracts. This would enable them to avoid the losses on paper that would, combined with the cash flow exposure Aspen faces, cause an increased cost of capital and potentially a loss of capital from investors and creditors. However, we feel that the benefits ofdisallowing the use of installment payments would not outweigh the potential costs.
This move would cut Aspen’s exposure to cash flow risk, but it would be a sign of bad faith with their customers. The customers have freedom to make installment payments and do not have to worry as much about their own risk exposure in these transactions (although any company making foreign transactions will...