Wednesday 13 March 2013

Currency risk

Radio New Zealand reports international student visa numbers are down; they blame the high dollar.

The real cost of tertiary education in New Zealand can vary substantially with exchange rates. There isn't much that any University can do about levels, but we could perhaps be doing more to reduce uncertainty.

Who is better placed to mitigate the risk of currency fluctuations: a family sending their kid abroad for study, or large enterprises with budgets in the hundreds of millions and with finance departments?

A first step in mitigating that risk would be exchange-rate-sensitive international student fees. We could offer tuition packages allowing international students a few ways of offloading currency risk:
  • Pre-paying multiyear tuition to lock in current exchange rates, with guaranteed refund in home-currency dollars if the student drops out [the University then forward contracts or buys options to limit its exposure, enjoys earning interest on the pre-paid fees];
  • Tuition guarantees: for an up-front fee, guarantee that the per-course tuition fee as measured in the student's home-currency will not vary upwards by more than some amount. Set the up-front fee so that it's enough to buy options to lay off the risk. So long as the University can buy those option contracts more cheaply and with fewer hassles than can a student, this should be a worthwhile proposition;
  • Exchange rate insurance: the University sells to incoming students contracts that give them a cash bonus if their home currency drops by a set amount. Tuition is maybe a third to a half of an international student's total cost of study. If the home currency tanks or the NZD jumps, living here gets a whole lot more expensive. Universities can use the up-front fees to buy option contracts on foreign currency that would let them pay out the students in case of dramatic currency fluctuation. Again, so long as large institutions have cheaper access to these kinds of contracts, this should work.
As best I'm aware, no university in New Zealand offers these kinds of currency deals; I've never heard of their being offered in other countries either. The odds that I'm missing something big and important seem larger than that it's just the usual non-profit inertia - it's unlikely that everybody would be missing this trick if it really were a twenty dollar bill on the sidewalk. Then again, as Tyler Cowen put it:
I work in what is perhaps the most competitive and successful sector in the most competitive and successful economy of all time.
And yet what I see around me is a total, total mess.  And I believe my school to be considerably above average in terms of how well it is run.
If somebody can tell me what I'm missing, I'd appreciate it. 

Another option that could help, and as suggested previously, the government could guarantee that international students completing a degree at one of our better tertiary institutions would be given permanent residence on degree completion, subject to the usual criminal background and health checks. The path from student visa to work visa and residence is pretty easy, but it adds uncertainty for students who don't know that it's likely to work out. Making the default be permanent residence on completion unless you screw something up badly, rather than having to go back home unless you get everything right, could make the degree more attractive even when the dollar is higher for a longer period. Added benefit: foreign students currently cross-subsidise domestic students. Increasing the ratio of foreign to domestic students would effectively increase tertiary funding without it having to hit the government's books.

Update: Luis suggests some reasons:
Management costs per student shouldn't be that high - when the student purchases the contract, you buy the option contracts, then forget about it until you need to execute. Risks of screwing it up are large though if universities are incompetent at this kind of thing. The link Luis provides points to the temptation to overmanage and earn on the hedge rather than just keep it as insurance. I doubt that any university's portfolio of international students includes enough home-government funded students to make the packages not worth offering, but it could be true in some places.


  1. I think you've got a damn good point here Eric... Unfortunately I don't think that a lot of institutions have the foresight to look into this. After all the idea of exchange rate hedging (insurance) is probably a bit out of their comfort zones... I think that's the only thing that you're 'missing'...

  2. Eric says :
    "the government could guarantee that international students completing a degree at one of our better tertiary institutions would be given permanent residence on degree completion, subject to the usual criminal background and health checks. "

    A very good idea indeed Eric. Residency is much harder to achieve than most people would know. Residency on qualification is a great idea, one of your best.
    On the question of the high dollar, we actually have a low dollar,, Australia has a high dollar and Canada has a high dollar and look at success , and dream why you would want us less

  3. The universities do often absorb the currency risk in dealing with foreign grants and contracts. I don't know whether they hedge it or carry the risk themselves, but it's an issue they are familiar with.