Part Seven Amy of Financing Tacties Lates, Obs, and Potegn Currency in exchange rates the new order would not even be us profitable as the original order had turned out to be! Adhesives Market The market for adhesives was dominated by a few large finns that provided the Vas bulk of adhesives in the United States and in global markets. The adhesives giants had International manufacturing and sourcing capabilities. Margins on most adhesive were quite slim since competition was fierce. In response, successful finns had devel oped over more efficient production systems which, to a great degree, relied on econo mios of scale The focus on scale economies had left a number of specialty markets open let small and technically savvy firms. The key to success in the specialty market was so the efficient manufacture of large quantities, but figuring out how to feasibly and eco nomically produce relatively small batches with distinct properties. In this marke good chemist and a flexible production system were key drivers of success. Bale Adhesives had both. The business was started by Doug Baker's father, a brilli chemist who left a big company to focus on the more interesting, if less marketa products that eventually became the staple of Baker Adhesives' product line. W Baker's father had retired some years ago, he had attracted a number of capable employees, and the company was still an acknowledged leader in the specialty kets. The production facilities, though old, were readily adaptable and had been maintained Until just a few years earlier, Baker Adhesives had done well financially whe growth in sales had never been a strong point, margins were generally high and levels steady. The company had never employed long-term debt and still did not dose The firm had a line of credit from a local bank, which had always provided suffici funds to cover short-term needs. Baker Adhesives presently owed about USD180 on the credit line. Baker had an excellent relationship with the bank, which had se with the company from the beginning. Novo Orders The original order from Novo was for an adhesive Novo was using in the produc of a new line of toys for its Brazilian market. The toys needed to be waterproof the adhesive, therefore, needed very specific properties. Through a mutual in Moreno had been introduced to Novo's purchasing agent. Working with Doug Ba she had then negotiated the original order in February (the basis for the pricing of original order is shown in Exhibit 38.1). Novo had agreed to pay shipping cos Baker Adhesives simply had to deliver the adhesive in 55-gallon drums to a ne shipping facility The proposed new order was similar to the last one. As before, Novo agreed make payment 30 days after receipt of the adhesives at the shipping facility. Bak ticipated a five-week manufacturing cycle once all the raw materials were in place materials would be within two wees Allowing for flexibility. Mo believed to be received about the month from der placement that was about how long the one look for the Most expected tiptop men co the desired upon todely, womewborn Exchange Risks With her newfound waren of exchangers, Moreno bad weddi- tonal information change before de moting with Dog Baker The history of the doll to exchange rate is town in chibit 35.2. Further nom, the data in thibit provided the most recent into on my keua and an estimate of the cupected future (September 5, 2006) sport from forecasting service Men hadded her concerns about exchange rate changes with the bank when she added for conversion of the original Novo Pyment The hink Helplus wwwys had described two ways to which Baker could mitigate the ex changes from any new order hedge in the forward to here in the money Hedge in the forward market Bank would in provide their clients with good exchange rates for the fu- reach of currencies (forwart rates. These contacts specifiod u date, an amount to be changed, and a rate. Anybunk free would be built into the rate By securing a forward rate for the date of a foreign currency dowominated costs flow, a fine could eliminate any risk due to currency Nuctuations. In this case, the antich puted future intlow of real from the sale to Novo could be converted at rate that would he known today Hedge in the money markets Rather than eliminate exchange risk through a contracted future exchange ito, a firm could make any currency exchanges at the known current porte. To do this, of course, the fire needed to convert future expected cash flows into current cash flows. Thin was done on the moocy market by borrowing today in a foreign contency against an ex- pecind unreindow or making a deponit "day" in a foreign account so as to be able to meet a future outflow. The mount to be borrowed or deposited would depend on the Interested in the foreign currency because a fim would not wish to transfer more on do than what would he needed. In this case, Baker Adhesives would borrow in mais amableDoug Boat Alice the Northy bond the discuss Purt Seven Analysis of Finance Les Options and Foreign Currency against the futuro intlow from Novo, The mount the company would borrow would be an amount such that the Novo receipt would exactly cover both principal and interest on the borrowing After some discussion and negotiation with the bank and bank stiliates, Moreno was able to secure the following agreements: Baker Adhesives" bank had agreed to offer a forward contact for September 5, 2006, at an exchange rate of 0.4227 USD/BRL An affiliate of the bank, located in Brand familiar with Novo, was willing to provide Baker with a short-term real loun, secured by the Novoteccivable, at 26%. Moreno was initially shocked at this rate, which was more than three times the 8.52% rute on Baker's domestic line of credit, however, the bank described Brazil's historically high inflation ind the recent attempts by the government to control inflation with high interest rates The rate they had secured was typical of the market at the time The Meeting It took Doug Baker some time to get over his disappointment. If international sales were the key to the future of Baker Adhesives, however, Baker realized he had already learned some important lessons. He vowed to put those lessons to good use as he mod Moreno turned their attention to the new Novo order. Case 38 Baker Adhesives *57 EXHIBIT 38.1 ! Novo Price Calculation on Initial Order (figures in US dollars unless otherwise specified) Labor 6,000 Moteris 32 500 Manufacturing overhead 4.000 Administrative ovechead 2,000 Total costs 44.500 Profit margin (129 6,068 Cost plus profit margin in dollars 50,568 Conversion (USD/BRL) 0.4636 Cost plus markup (DRL) 109,077 Amount Collons 90.15 Quoted price per gallon (BRL 1.210 Notes The exchange rabe used in the calculation was obtained from the Worl Street Joomo Overhead was applied based on labor hour The raw mense was based on the original cost book value of the materials The wounded price of R100.15 per goon was dit negotiations with Now. Thus, for the final order, Novo was bited a total of ORL90 15 x 1210 BROS.091.50 Source. Created by cate wher Part Sever Af Finance Team EXHIBIT 38.2 Exchange Rated Money Market information Exchange rates for the role of June, 2005 (USD) Bid on rool As for real Consensus forecast bid for Sopome.2006 Consensus forecast for Sprember 5, 2006 Standard deviation of monthly exchange rate changes 2005 Year to date 2008 Interbank rates annual focuvertes 04371 04234 0.4239 553 19.47 5.08 United States Doc Wideo Bio on Real Dolae Value of Real USRL 0.5000 4800 04600 04400 0.4200 0.4000 3800 0 3600 3400 0.3200 03000 > SOLA 71/2005 8/2005 VZOOS 471000 5/2005 10/2005 Stoel 5/2006 672000 W2066 w/12000 V/2006 2/12000 91/2005 The summary explains the situation where a firm faces an issue in the international trade of international Trailid management. The suggestion 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 hedge and the other one using the money market hedge. The paper describes how to hedge the foreign exchange risk in detall. For example, whether the firm takes a long or short position on the forward market or how it creates a hedging strategy with a series of actions on the money market. Students The summary explains the situation where a firm faces an issue in the international trade or international financial management. The suggestion 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 hedge and the other one using the money market hedge. The paper describes how to hedge the foreign exchange risk in detail. For example, whether the firm takes a long or short position on the forward market or how it creates a hedging strategy with a series of actions on the money market. Students Part Seven Amy of Financing Tacties Lates, Obs, and Potegn Currency in exchange rates the new order would not even be us profitable as the original order had turned out to be! Adhesives Market The market for adhesives was dominated by a few large finns that provided the Vas bulk of adhesives in the United States and in global markets. The adhesives giants had International manufacturing and sourcing capabilities. Margins on most adhesive were quite slim since competition was fierce. In response, successful finns had devel oped over more efficient production systems which, to a great degree, relied on econo mios of scale The focus on scale economies had left a number of specialty markets open let small and technically savvy firms. The key to success in the specialty market was so the efficient manufacture of large quantities, but figuring out how to feasibly and eco nomically produce relatively small batches with distinct properties. In this marke good chemist and a flexible production system were key drivers of success. Bale Adhesives had both. The business was started by Doug Baker's father, a brilli chemist who left a big company to focus on the more interesting, if less marketa products that eventually became the staple of Baker Adhesives' product line. W Baker's father had retired some years ago, he had attracted a number of capable employees, and the company was still an acknowledged leader in the specialty kets. The production facilities, though old, were readily adaptable and had been maintained Until just a few years earlier, Baker Adhesives had done well financially whe growth in sales had never been a strong point, margins were generally high and levels steady. The company had never employed long-term debt and still did not dose The firm had a line of credit from a local bank, which had always provided suffici funds to cover short-term needs. Baker Adhesives presently owed about USD180 on the credit line. Baker had an excellent relationship with the bank, which had se with the company from the beginning. Novo Orders The original order from Novo was for an adhesive Novo was using in the produc of a new line of toys for its Brazilian market. The toys needed to be waterproof the adhesive, therefore, needed very specific properties. Through a mutual in Moreno had been introduced to Novo's purchasing agent. Working with Doug Ba she had then negotiated the original order in February (the basis for the pricing of original order is shown in Exhibit 38.1). Novo had agreed to pay shipping cos Baker Adhesives simply had to deliver the adhesive in 55-gallon drums to a ne shipping facility The proposed new order was similar to the last one. As before, Novo agreed make payment 30 days after receipt of the adhesives at the shipping facility. Bak ticipated a five-week manufacturing cycle once all the raw materials were in place materials would be within two wees Allowing for flexibility. Mo believed to be received about the month from der placement that was about how long the one look for the Most expected tiptop men co the desired upon todely, womewborn Exchange Risks With her newfound waren of exchangers, Moreno bad weddi- tonal information change before de moting with Dog Baker The history of the doll to exchange rate is town in chibit 35.2. Further nom, the data in thibit provided the most recent into on my keua and an estimate of the cupected future (September 5, 2006) sport from forecasting service Men hadded her concerns about exchange rate changes with the bank when she added for conversion of the original Novo Pyment The hink Helplus wwwys had described two ways to which Baker could mitigate the ex changes from any new order hedge in the forward to here in the money Hedge in the forward market Bank would in provide their clients with good exchange rates for the fu- reach of currencies (forwart rates. These contacts specifiod u date, an amount to be changed, and a rate. Anybunk free would be built into the rate By securing a forward rate for the date of a foreign currency dowominated costs flow, a fine could eliminate any risk due to currency Nuctuations. In this case, the antich puted future intlow of real from the sale to Novo could be converted at rate that would he known today Hedge in the money markets Rather than eliminate exchange risk through a contracted future exchange ito, a firm could make any currency exchanges at the known current porte. To do this, of course, the fire needed to convert future expected cash flows into current cash flows. Thin was done on the moocy market by borrowing today in a foreign contency against an ex- pecind unreindow or making a deponit "day" in a foreign account so as to be able to meet a future outflow. The mount to be borrowed or deposited would depend on the Interested in the foreign currency because a fim would not wish to transfer more on do than what would he needed. In this case, Baker Adhesives would borrow in mais amableDoug Boat Alice the Northy bond the discuss Purt Seven Analysis of Finance Les Options and Foreign Currency against the futuro intlow from Novo, The mount the company would borrow would be an amount such that the Novo receipt would exactly cover both principal and interest on the borrowing After some discussion and negotiation with the bank and bank stiliates, Moreno was able to secure the following agreements: Baker Adhesives" bank had agreed to offer a forward contact for September 5, 2006, at an exchange rate of 0.4227 USD/BRL An affiliate of the bank, located in Brand familiar with Novo, was willing to provide Baker with a short-term real loun, secured by the Novoteccivable, at 26%. Moreno was initially shocked at this rate, which was more than three times the 8.52% rute on Baker's domestic line of credit, however, the bank described Brazil's historically high inflation ind the recent attempts by the government to control inflation with high interest rates The rate they had secured was typical of the market at the time The Meeting It took Doug Baker some time to get over his disappointment. If international sales were the key to the future of Baker Adhesives, however, Baker realized he had already learned some important lessons. He vowed to put those lessons to good use as he mod Moreno turned their attention to the new Novo order. Case 38 Baker Adhesives *57 EXHIBIT 38.1 ! Novo Price Calculation on Initial Order (figures in US dollars unless otherwise specified) Labor 6,000 Moteris 32 500 Manufacturing overhead 4.000 Administrative ovechead 2,000 Total costs 44.500 Profit margin (129 6,068 Cost plus profit margin in dollars 50,568 Conversion (USD/BRL) 0.4636 Cost plus markup (DRL) 109,077 Amount Collons 90.15 Quoted price per gallon (BRL 1.210 Notes The exchange rabe used in the calculation was obtained from the Worl Street Joomo Overhead was applied based on labor hour The raw mense was based on the original cost book value of the materials The wounded price of R100.15 per goon was dit negotiations with Now. Thus, for the final order, Novo was bited a total of ORL90 15 x 1210 BROS.091.50 Source. Created by cate wher Part Sever Af Finance Team EXHIBIT 38.2 Exchange Rated Money Market information Exchange rates for the role of June, 2005 (USD) Bid on rool As for real Consensus forecast bid for Sopome.2006 Consensus forecast for Sprember 5, 2006 Standard deviation of monthly exchange rate changes 2005 Year to date 2008 Interbank rates annual focuvertes 04371 04234 0.4239 553 19.47 5.08 United States Doc Wideo Bio on Real Dolae Value of Real USRL 0.5000 4800 04600 04400 0.4200 0.4000 3800 0 3600 3400 0.3200 03000 > SOLA 71/2005 8/2005 VZOOS 471000 5/2005 10/2005 Stoel 5/2006 672000 W2066 w/12000 V/2006 2/12000 91/2005 The summary explains the situation where a firm faces an issue in the international trade of international Trailid management. The suggestion 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 hedge and the other one using the money market hedge. The paper describes how to hedge the foreign exchange risk in detall. For example, whether the firm takes a long or short position on the forward market or how it creates a hedging strategy with a series of actions on the money market. Students The summary explains the situation where a firm faces an issue in the international trade or international financial management. The suggestion 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 hedge and the other one using the money market hedge. The paper describes how to hedge the foreign exchange risk in detail. For example, whether the firm takes a long or short position on the forward market or how it creates a hedging strategy with a series of actions on the money market. Students