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project_for_global_financial_management.pdf
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Project for Global Financial Management
1. The term paper is a double-spaced 10-15 page paper. It contains introduction, main body,
and conclusion along with reference and table or graph, if necessary.
2. The paper includes both summary for the case and suggestion for addressing the issue in
question.
3. The summary part explains the situation where a firm faces an issue in the international
trade or financial management.
4. The suggestion part illustrates the strategies designed to help the firm address the issue.
In this case, there are two possible solutions to hedging the foreign exchange risk: one
strategy based on the forward market or the other one using the money market.
5. The paper describes how to hedge the foreign exchange risk in detail. For example, the
firm takes a long or short position on the forward market or it creates a hedging strategy
with a series of actions, based on the money market. Students use their knowledge from
the class discussion.
6. For the presenters: In addition to the paper, they need to prepare PowerPoint slides for the
class presentation. Each presentation takes about 15-minutes and includes a brief Q&A
session.
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6
early June 2006. Doug Baker mer
wirh his sares oranager
Ari-qsa r{oreno to discuss ihe results of a recent {‘oray
into internarional n.,u.k”ir.
new territory
fbr: Baker Acihesives, a snrat company
manufacturin_e speciarty adhesi’es.
Llntir a
recent sale to No’o- a Brazilian toynanufacturer.
ail of Baker Aclhesivcs, sales hacl
been ro compan:ies not far f’om
irs N..urt. Nei.r, Jersey.
facility.
Tt;r;”;
As
*”r”i.o”.i”g
u’s. ma’*licturing
;:::i::ff:.
continued to rnigrate overseas,
howe’er. Baker wourd be
pressure fo find new ,,ra,keis,
which q,ould i..*,.ijy r””cl ro inrerna_
Dorig Baker was looking lbrwa’d to
this,meeting. The lecent sale to
Novo.
while modest in size at t,zt} gallons,
tJl”.n
a
signiiicant
financiar
boosr
fo
Baker Adhesives.
The order haJusea ,pr”*. rai.v-materials
in’enfory that Baker
had considered reseting at a significaniro.,
o feu,mo’ths before the Novo order.
Furthelmore, the companyhad ieen
running well unrler capaciry a’d rhe
orcler r,vas
easily accommodated within the procructioi
sched*re. rrrJ-p”rJ”r”
the meeting
was to finalize details on a new
or-cler from Novo tha.t rvas tobe’50% “f
iarger tnan the
original order. Arso. payment fbl the
earrier No’o order hadjust been
receivecr and
Baker was looking fb’ward ro paying
du*n ,ome of trre barance on the lir:rn,s
ri’c
of credir.
As Baker sat dorvn with Mo.eno,
he cor-ricr terl imnecriately that
he r.vas in fbr bad
news’ It came quickly. Moreno pointerl
out that si’ce ihe x*”
,”as cienomi_
nated in Brazirian .eais (BRL), th.
puy-.nt from No’o had to be conve.rted
“.0*
into U.s.
dollars (USD) at the cu’-ent ex”nangl
rate.r Gi’en exchange_rate changes
since
the
time Baker Adhesi’es and Novo haii
agreed on u pe.-gotion price. the
varue of the
payment was subsiantiariy lorver
than anlicipated. Moie abrpp”irrirrs
r.vas the faot
that No’o rvas unwilrin-s to consider
u .harrge in rrre per-garlon price
for the followon order’ TransratetJ into dollar:s.
rherefore. ih. n”,” ordcr rvouri
not be as profrtable
as the originar order hacl initiaily
appeared. In fact, gi’en furtrrer
changcs
-=-‘Tlre Brazilian
plural
(as
“”,icp”,”.
cu’ency tr t*”:l:o,r? as re.ar..jrthe singular
in “sales arc denorninated in reais’,).
(as
in
.,the
‘r.
Brazilian
uraz*dri real
reai,,)) and re(
rears ur rhe
This case was prep”ed by Associate
P1;rfeys.r.xlalc Lipson. Ii *,as rvrirte’
as a basis rbr cjass rriscussion
i’a.l.ie’than r0 i’ustfate effective or
ineffe*ive r,’nnari,,g oiun oominisrrafi,e
siruarion. copS,rigru o 2007 by
theUni’ersifyofVir.giniaDarclenschool
lrou,,Arr;ou.Cio.f”,i”*”,,,”_.A.Allrighls
r”rrr,iil-jir,rrranr”op_
ier”sctrtl rut <:':rtttil tu sales@dartlenbusinesspuLrlishin-ec;;,.,i;;rr.,,,
o.f rhis ptLitlicatio, rt..,r:e
reproducetl,
stored ir a reffe"-al ;,,-steni, u,ted bt
ct. spreaclsnr"r, or],oir,rl*ii*a
itt.ro,fitnn nr by anv-nean.s_electronic,
illeclnnical, phorocopyirzg, recording.
rn.ott urrrir"-r";,l.uur"rto pourirsian
ofthe Dorden Schoor h-otutdarion.
't:,;;l.t
;a:
El::!:il::r:tr:iiii
PailSeven Analysis ofFirrancilgTacrics;
Leases.
Optiols, and Foreign Currency
in exchange fafes the new order would not even be
as
profitatrle as ihe origirial order
had turned out to bel
.Adhesives
Market
The rnalket for adhesii'es was dominatecl by a few large fll'rns rhai providccl the r,,
bulk oiadhesives in thc Urrited States ancl in global malkcts. The adhesives sianrs::.:
international manufacturing and sourcing capabilities. N,largins on mosr adhesi',. ,
slin since competition rvas fierce. In response, succbsslll firnts had de:.r,-^
r,vere quite
oped ever nrole efTicient plodr-rction systenrs ra'hich, to a greai degree, reliecl or ccrri:::.:
mies of scale.
Thc focus on sca]e ecorrornies had left e number of specialt,v nrarkets opcr, small arrd tcchnicaliy savvy firms. Thc key to success in the specialtl,nralket \,1. :r the efficienL manufacrure of large quanrirics, but figuring our how ro feasibiy ancj .-.
nonricall.v ploduce relativeJy small batches rvith ciistinct propefties. In this mar.;.', '
good chernist aud a flexible production system were key drivers of success. Eri;*,
Adhesives had borh. The business was smrred by DoLrg Bakcr's fnther'. a bril:i,:chemist q'ho left a big company to focus on the iuore inreresting. if icss markeiei.;r.'
ploducts that evenrually bec:ame the slaple of Baker Adhesives'product line. i1-;...-,
Baker's fathel had retircd solne years rso, he had artracred a nunrber of capablt :,
emplovees. and the company was srill an acknowleclged leacler in thc spccirli; ii a:
kets, The production f'acilities, though old, were readily adaptable and had be e :r - - .
.
i
mai.ntained.
,l-tt'
Until just r fer',, lears erulier. Bakcr Adhesives hacl done rvelj finarrcjallr. ,,.
sro\'th in sales had never t)eelr a strong pr_rinL, rnar.gins v,ere genefally high aiic, ,
'
levels steady. The conpany had never employed long-terrn debt and still did no, .:. -.,._:
Thc iilm had a line of cledit I'rom a local barrk, rvhiclr lrad alu,ays nrtrricied sir.;:,..
lurrcl: to covct shr.rLl-term neecis. Blker Adhesives presenil), onr.1'l ,bo,,t USDir '*
on the credit 1ine. Baker had an excellent relationship with the bank. r,vhich ha:r r.vjth the company from the beginning.
._..
:
:
Novc 8rders
The original order from Novo rvas for'an adhesive Novo r,vas using in the pr.-ac=.,:.,-,,.
of a ne*' line of roys for its Brazilian nrarket. The roys needed ro bc u,arerpr,
the adhesir,e, therefore. needed very specific properties. Through a mutua- -:,
-i
tr'Ioreno had been inti:oducecl to Noi,o's pur.chasing agent. wor,king with Doug .,,.r
she had ihen negotiarecl the ori-einal order in February (t1re basis ror tLe pr;cin! i,original order is shown in Exhibit 38"1). Novo had agreed to pay shippin-e ci.
:-,
Raker Adhesives simply had to delivcr rhe adhesive in 55-gailon
0:800
0.3600
0.3400
o.3200
Date
Source: Credt3d by ca:e ?ritei
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