Chloé Le Lan

Baker Adhesives

1. How do exchange rates affect Baker’s business decision?

Baker Adhesives faced the danger of unpredictable currency rates as they extended their company
internationally. They had recently secured a transaction to Novo, a Brazilian toy company.

Unfortunately, by the time Baker Adhesives got the cash from Novo, the exchange rates had changed
and the USD had depreciated. Instead of converting the final payment amount back to USD, it was
now expected to be changed at the current exchange rate, resulting in a decrease in overall revenues
and profit.

Companies that conduct business in other countries are forced to confront exchange rate risk. In this
situation, therefore, the order's value was influenced by exchange rate fluctuations, resulting in a
decrease in earnings for the firm as the USD depreciated against reals. Currency hedging is used to
prevent from fluctuations in currency exchange rates that are either unexpected or expected.

2. What are Baker’s options?

As stated in the text, Baker might accept the bank's advice to manage exchange rate risk in two ways:
hedging in the future market or hedging in the money market.
Baker adhesives can engage into a forward contract with the bank in which the bank commits to
acquire a certain quantity of reals from the business in return for USD at a predetermined forward
rate on a future date. This manner, the danger of future USD appreciation and a drop in predicted
earnings might be reduced. Alternatively, the company might transform future predicted cash flows
into current cash flows and exchange currencies at a known current spot rate. As a result, Baker
Adhesives should borrow in reals against the payment the company expects from Novo.

3. Developm3 recommendations for the company.

Exchanges rates are a tricky subject when we speak about companied selling internationally.
These two methods seen above are the most common ways to hedge against currency risk, but they
are not the only ones. One can also resort to simple options where the investor will then set up his
own strategies.

An option is a contract that gives its holder the right, not the obligation, which differentiates it from a
future contract, to buy or sell an underlying asset at a predetermined price and date.

The option can be on any asset, but what interests us in the context of currency risk are currencies.
To insure yourself against this foreign exchange transaction risk, you have the option of using a bank.
However, a certain number of shortcomings are commonly reproached to this traditional offer: high
fees, a rate often far from the market rate, delays in transferring sums, a lack of practical and
technical accessibility, etc.
Chloé Le Lan

It is to compensate for these shortcomings that new players, via the Internet, have developed
innovative service offers.
We can mention for example
Saxo Banque, a generalist broker with a corporate offer, Kantox: access to the market in real time at
lower costs or iBanFirst.