Case 37: BAKER ADHESIVES
Robert F. Bruner, Kenneth M. Eades, Michael J. Schill, Case Studies in Finance: Managing for
Corporate Value Creation, Sixth Edition, McGraw Hill, 2010; Excel Template:
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 forwardcontract
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?
Supporting Spreadsheet Files
For students: Case_37.xls
1. What was the revenue actually received from the original order, and how does it affect
the profitability of that order?
2. How might exchange-rate risk be managed?
3. Assume Baker decides to take the follow-on order, how might the forward-contract and
money-market rates be used to hedge the future expected inflow?
4. Why do we see a preference for the forward-market hedge over the money-market
5. With the forward or money-market hedge in place, can the company be completely sure
there will be no exchange risk?
6. Should Baker accept the new order?