The following questions should support your analysis of the case and help structuring the so-

lution. Please formulate your solution in up to 8 pages (Times New Roman 12pt, spacing 1.5,
margins 2,5 at all sides). Also be prepared to verbally present your arguments and results in
class and discuss it with the other groups.
There is no unique correct solution. The quality of your solution depends on the depth of your
analysis and the clarity and correctness of your arguments.

Baker Adhesives

Questions for Assignment

1. How profitable is the original sale to Novo once the exchange-rate changes are acknowl-
edged? How might the exchange-rate risk, which affected the value of the order, have
been managed? Do not forget to consider possibilities beyond the two hedges introduced
in the case.
2. If Baker agrees to the new Novo sale they should consider hedging the exchange rate risk.
The case introduces three possibilities:
(1) no hedge,
(2) hedging using a forward contract, and
(3) hedging using the money market.
Clearly describe the hedging possibilities in your own words. What exact steps need to be
taken by Baker to implement the hedges?
3. Are the money markets and forward markets in parity?
4. Determine the present value of the expected future cash inflow for the three possibilities.
Explain the discount rates you are using. Why is it necessary to compare present values?
5. Compare the three present values and comment on the differences. Why is the cost of the
two hedging possibilities different? Which one would you prefer? Why?
6. Is the exchange rate risk completely eliminated by the hedges?
7. How profitable will the follow-on order be? Would you make this new sale? Would you
hedge it and – if yes – how?