Business schools are notorious for not practising what they teach. A glaring case in point is the failure of most schools to help their incoming international students understand the dangers of fluctuating exchange rates.
The current volatility in currency markets can have far-reaching consequences for international students who may suddenly find themselves facing a funding shortfall.
Business schools desperately need a complete rethink on funding models for international students. The irony is that the solution – hedging – is already at hand and is one of the most basic lessons of the MBA degree.
To understand the nature of such exchange-rate risk consider the plight of one of the authors of this article, Sanket Mehta. When Sanket left Mumbai and headed for Orange County, California, to attend the Merage School of Business, he had carefully budgeted his two-year MBA programme at $100,000, or Rs4.5m in Indian currency. Through a combination of savings, family support and a loan, he believed he could comfortably make ends meet and achieve his dream of earning an MBA in America.
Unfortunately, over the course his programme’s first year, the rupee depreciated in value by more than 20 per cent relative to the US dollar. That left Sanket scrambling in his second year with a shortfall of an additional 1m rupees to complete his degree.
The irony, of course, is that if Sanket had already had the skills he would acquire in business school, he would have understood the importance of hedging his exchange-rate risk and known how to do it. Indeed, all he would have had to do was buy a “call option”.
As any business school finance professor will tell you, a call option is a form of insurance that locks in a value of some financial instrument, in this case the Indian rupee. The beauty of a call option is that for a relatively small sum – effectively an “insurance premium” – Sanket could have protected himself from any rupee depreciation.
The obvious problem with this solution is the aforementioned Catch 22: to implement his call option strategy, Sanket would have had to have understood various concepts in macroeconomics and finance that he was coming to get his MBA for!
To put this problem more broadly, without an MBA education, it is unlikely that many international students will have the options trading skills, much less the macroeconomic foresight, to execute a hedging strategy when travelling overseas for their degree. That is why the real solution is for every university to offer its international students some form of exchange-rate insurance or exchange-rate guarantee as part of their admissions package.
Besides helping students, such a policy has two obvious benefits for a business school. First, it ensures that overseas students can finish their degrees even if they suffer substantial currency losses while attending school. In this way, the programme reduces attrition attributable to economic volatility.
Second, and perhaps far more important, an exchange-rate guarantee would be a great marketing tool to attract more overseas students to the institution. It not only provides assurances to students that they will have the funds to finish their programme. It also signals that the school is innovative, caring and sophisticated in its understanding of the global macroeconomic environment.
We do not know how many universities are doing this. We do know that our own business school does not offer such services. We also know that any college or university that wants help in attracting and retaining international students in a world of growing exchange-rate risk would do well to offer exchange-rate guarantees to its students.
In fact, it is far easier and cheaper for universities with large pools of foreign students to engage in such hedging than it is for individual students; and every educational institution that has even a modest foreign student component – not just business schools – should have a specialist in their admissions office. This is a new globalised world we live in and this is one change that would match the times.
Business schools are always eager to attract international students to increase the diversity of the cohort and improve the MBA experience. It is only fair, therefore, that they use their specialist financial knowledge to help these students at the beginning of their programme when they need it most.
Sanket Mehta is an MBA student and Peter Navarro a professor at the Merage School of Business, UC-Irvine.