1. How might exchange-rate risk be managed? Identify the risk and discuss the mechanisms used for hedging. Highlight the various operating and financial decisions that would address the currency risk. 2. 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? Calculate an expected amount without any hedging, then calculate forward-contract and money-market rate hedges. What can you say about the cost of eliminating the currency risk? 3. With the forward-contract and money-market hedge in place, can the company be completely sure there will be no exchange risk? Identify and discuss the assumptions implicit in these hedging strategies. Are there any residual risks that make the hedge less than perfect? 4. With a hedging strategy in place should Baker accept the new order? Consider the costs outlined in the case and how they may be adjusted for rising costs as well as the impact of the new exchange rate. Note that not all costs will be relevant for this analysis.

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