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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.

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baker adhesives case solution

Baker Adhesives Case Solution

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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