Submitted by: Submitted by Lyndia
Views: 24
Words: 1419
Pages: 6
Category: Business and Industry
Date Submitted: 04/19/2015 12:15 PM
Company Summary
In speciality market for adhesive industry
Just made first international sale to Brazilian toy manufacturer Novo
International Sales are the key to success in the future
Changes to exchange rate lowered the value of both orders.
Problem
Baker wants to protect itself from price fluctuations in the exchange rate
Five options for risk management:
1. Do nothing
2. Hedge in the forward market
3. Hedge in the money markets
4. Trade in the futures market
5. Hedge with options
How to mitigate the risk? Currency Hedging
Currency hedging is the act of entering into a financial contract in order to protect
Against unexpected, expected or anticipated changes in currency exchange rates
when conducting business internationally.
Advantages
* Lower risk
* Provides protection against possible loss
* Locks in the profit
* Can save time
Currency Hedging
The foreign exchange hedging process
1. Identify Exposures
2. Formulate currency risk management policy
3. Determine budget rates and goals
4. Formulate hedging strategy
5. Execute hedging strategy
6. Evaluate results and adjust
The hope is that by minimizing the exposure of the investor to unfavorble shifts
In the money market, a reasonable return on the investment will be achieved even if the currency involved
Takes a fall
Exchange Rates
Brazil is one of the world’s most open nations in terms of international trade
Increasing exchange rate risk exposure.
The depreciation of BRL Brazilian Reias against the dollar, results in Baker receiving less money in transaction
Circumstances
Novo was able to secure the following agreements with Baker:
Forward Option: Baker adhesives’ bank had agreed to offer a forward contract for Sept. 5, 2006
At an exchange rate of 0.4227 USD/BRL.
Money market option: Affiliate of the bank located in Brazil was willing to provide Baker with a short term real loan,
Secured by the...