Unit 4 Assignment Case Study Analysis

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University of Wisconsin, Platteville *

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INTERNATIO

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Economics

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Jan 9, 2024

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 What was the revenue actually received from the original order, and how does it affect the profitability of that order? Size of order: 1210 Price per Gallon: $90.15 BRL Total: $109081.50 Exchange Rate: 0.4368 Total: $47646.80 USD Expected: $50568 USD Realizing less revenue than expected effects the profitability of that order in the fact that there is less money made from that order. For example, if you are expecting to receive $100 and only receive $80, there is a 20% profit loss.  How might exchange-rate risk be managed? One way that the might manage the exchange-rate risk is to use a forward exchange option. This means that if there is any doubt, Baker has the right but no obligation to deliver an agreed amount of currency. Although there would likely be a fee associated with this option.  Why do we see a preference for the forward-market hedge over the money-market hedge? We see a preference for the forward-market hedge over the money-market hedge because there is an increase in revenue with the forward-market hedge. This is mostly due to the company’s ability to predict exchange rates, and how the company wants to mitigate risk.  With the forward or money-market hedge in place, can the company be completely sure there will be no exchange risk?

Although forward and money-market hedges can lower risk, there will not completely eliminate it. There will always be some risk due to the uncertainty involved. For example, there will always be the risk of unforeseen events such as natural disasters that can impact exchange rates.  Should Baker accept the new order? Baker Adhesives should accept the new order because although they would incur a loss when considering all revenues and cost, considering relevant costs shows that there is a profit. They should accept the contract in order to help reach the economies of scale, as long as the current capacity could handle the new order.

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