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Baker Adhesives Case Solution

Case ID - UV0738     Solution ID - 6997     1215 Words


Baker Adhesives case solution

‘Baker Adhesives’ is trying to venture into international markets. It has found a new client Novo Situated in Brazil. However Novo is willing to pay all the money in the local currency ‘real’. Doug Baker is getting worried about the exchange rate risks posed by the sale as the payment is destined to be at a future date. Doug baker wants to use some options dictated by his banks. However Doug wants to discover whether it would be beneficial for Baker in dollar terms to cater to these options or not. Currently Baker adhesives can either use a hedge in the forward or the money market.

Excel Sheet

Gain/Loss Calculations

PV of expected cash flows

Hedging using forward market

Hedging with money market

Questions Covered
  1. How profitable is the original sale to Novo once the exchange-rate changes are acknowledged? How might the exchange-rate risk, which affected the value of the order, have been managed?
  2. Assuming Baker agrees to the new Novo sale, determine the present value of the expected future cash inflow assuming: (1) there is no hedge, (2) the company hedges using a forward contract, and (3) the company hedges using the money market. Finding a present value is necessary for the following reason: With no hedge or a with forward-contract hedge, the cash flow will occur at the time of payment by Novo. With the money-market hedge, Baker receives a cash flow immediately.
  3. Are the money markets and forward markets in parity?
  4. How profitable will the follow-on order be? Would you make this new sale?
Baker Adhesives case solution, Currency, Hedging
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