John Kroeger
FINA 470
Baker Adhesive Case
March 22, 2012

1. How profitable is the original sale to Novo once the exchange-rate changes are acknowledged? How has the exchange-rate risk, which affected the value of the order, been managed?

In the original order, Nova was billed BRL 104,338.30 for their purchase. After the exchange of currency from BRL to U.S. dollars, Baker was estimated to receive $48,371.24 (104,338.30 * .4636). This means that Baker brought in $55,967.06 less from their deal with Nova than was expected. Since the exchange-rate risk was not managed, Baker brought in significantly less than was estimated from their deal with Nova and after subtracting their total cost from what they brought in, Baker only made a
If Baker chooses to use a forward hedging strategy, we will use the same formula to find the revenue for Baker in dollars however, we will use the exchange rate determined for the forward hedge, and this exchange rate is 0.4227.
160,430*0.4227 = $67,814 Baker revenue with forward hedge Lastly, we will look at how profitable a money market hedge would be for Baker. To do this we first have to find the loan amount if Baker takes out a Brazilian loan to hedge their deal with Novo using the rate given in the case, 26%. However, this annual rate needs to be converted to a three month rate because Novo’s payment will be paid three months after the order is placed so the loan will only be for three months, so in three months this rate would be 6.5% so this is the rate we will use to find the loan amount for Baker.
160,430/ (1+.065) = 150,640 this loan amount is in Brazilian real
Now to convert the loan amount to dollars, we use the exchange rate given for June of 2006 because that is when the loan would be taken out. This exchange rate is 0.4368.
150,640*.04368 = $65,800 loan amount in dollars If Baker chooses a money market hedge, their loan will be put into a money market account where it will yield 5.08% annually or 1.27% for three months.
65,800*(1+.0127) = $66,635 revenue Baker