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 hedge?

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?

Baker Adhesives (Baker) has just made its first foray into international sales and must come to grips with the impact of exchange-rate changes on the profitability of a past order. The company must also formulate a strategy for dealing with exchange-rate risks for future orders. The case is intended as an introduction to exchange-rate risk and the management of that risk. Upon receipt of payment from a past order, the firm realizes that exchange-rate movements have reduced the value of the sale. A follow-on order provides the context for exploring possible mechanisms for managing that risk. In particular, sufficient direction and information is provided to examine both a forward hedge and a money-market hedge.

The case can be used in a core finance class or dedicated international finance class to expose students to exchange risks and hedging. The case is designed to achieve the following learning objectives:

• To explore the magnitude and effect of exchange-rate risks.
• To illustrate exchange-rate risk management through two conventional hedges—a forward-contract hedge and a money-market hedge.
• To demonstrate market parity and identify how preferences arise from unique company characteristics.
• To explore issues related to pricing of international bids.