This is a Darden case study. An undersized adhesives firm is challenged with the threat of the exchange-rate risks as it takes beginners steps into global operations.
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This is a Darden case study. An undersized adhesives firm is challenged with
the threat of the exchange-rate risks as it takes beginners steps into global
operations. The receiving of payment from an unpegged foreign currency
labeled aprevious sale transaction demonstrated possible risks associated with
currency where as a possible follow-on order makes room to talk about
potential hedges. Further depth is given to the case with the fact that the
follow-on sale seems to be without a profit unless the assessment takes into
account the insignificance of the overhead costs and that the raw material’s
market value is less than the recorded value.
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?
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.
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