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The document discusses how fluctuations in the value of the Brazilian Real currency can impact aircraft manufacturer Embraer. It notes that Embraer earns revenue in US dollars from international sales but incurs costs in buying components in other currencies, creating risks from changes in exchange rates over time. While a weaker real may help export sales, it hurts the cost of importing components. The document considers some hedging strategies Embraer could use like currency swaps to reduce these risks from exchange rate movements.

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193 views5 pages

Masters Business Answers

The document discusses how fluctuations in the value of the Brazilian Real currency can impact aircraft manufacturer Embraer. It notes that Embraer earns revenue in US dollars from international sales but incurs costs in buying components in other currencies, creating risks from changes in exchange rates over time. While a weaker real may help export sales, it hurts the cost of importing components. The document considers some hedging strategies Embraer could use like currency swaps to reduce these risks from exchange rate movements.

Uploaded by

Robert Mariasi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Business 1

Embraer and the Gyrations of the Brazilian Real

[Your Name]

Wilmington University

Masters Business

13th February 2020


Answers 2

Embraer and the Gyrations of the Brazilian Real

Answer 1

Based on the economic history of the country Brazil, it was pointed out that when the

rates of the price inflation tend to increase, the country's currency in terms of foreign exchange

rate will drastically decline. On the other hand, once the inflation reaches a neutral point and is

considered under control, it is expected that the currency to increase its strength when compares

to the other available currencies. All of this can be proven by taking a look at the economic

history of the country. For example, during 2004 the value of one Brazilian Real was equal to

$0.312. Even so, during 2008, due to the drastic improvement in terms of economic condition

and also due to lower inflation, its value appreciated to $0.65. It continued to fluctuate based on

various factors. In 2016 for example, the Brazilian real was again depreciated to a value of $0.30.

During 2020 it reached almost and historical low values of $0.23. All of these prove that there is

indeed a strong relationship between the exchange rate and price inflation.

Examples of factors that could cause high inflation are represented either by monetary

expansion or by a high demand which tends to exceed the available supply. In order to control it,

the central banks will try to increase the value of interest rate and to restrict available credits.

This will ultimately lead to an increase in terms of cost of capital for the investors which will

reduce all forms of investments. Due to the fact that all of these will lead to an increase in terms

of unemployment, the country will enter a vicious cycle which will continue impacting the

inflation while also modifying the exchange rate. The country will most likely important more

than it exports which will depreciate its currency. This further confirms that the inflation and

interest rate but also the monetary policies are elements that can influence the value of the Real.
Answers 3

Answer 2

As it is going to be proven in the upcoming lines, a decline in the value of the Brazilian

Real when compared to the US dollar is a mixed situation. It is known that EMBR sells its

product on the international market. This means that they book the orders in the U.S currency

and once they are executed, they deliver it to the customers. From the moment since the

customer ordered the product and until it is delivered it takes around 2 to 3 years. Due to this,

during delivery time, the U.S dollar will worth more when converted to Brazilian Real at that

time which means that the company will achieve a great profit. Even so, all these advantages are

shadowed by the fact that they have to buy specific components in the international market too.

Same as with the boats, it takes some time for them to be delivered, which means that the

payment done to the suppliers will be higher when converted to Brazilian Real. Even so, it is

believed that the company will have more advantages than disadvantages due to the fact that the

bought components represent only a part of their final profit.

Answer 3

One of the risks is represented by transaction exposure. As it was exemplified in the

question above, there is a time lag between the moment the orders are processed and until the

products are delivered. During this period the exchange rate can have a negative impact on the

profit of the company. The financial statements will also be strongly influenced by the exchange

rate as they have to report their income statement, cash flow statements and also balance sheets

periodically and all of these are reported in the Brazilian currency. Overall, the company needs

to understand that being engaged in international affairs can have a devastating effect. A way to

minimize these negative outcomes is through exchange rate contracts or with the help of
Answers 4

exchange rate swaps. These will minimize the impact of transaction and translation exposure. On

the other hand, economic exposures can be reduced to an acceptable point by spreading their

activities to other countries that uses other currencies.

Answer 4

Even though it might have seen as a way to protect their profit, only a few experts

predicted the possibility of a financial crisis at a global level. Due to the fact that most investors

moved their investments to U.S $, this leads to an appreciation in terms of that currency. This

proves that indeed the company took the right decision. An alternative would have been to allow

negotiation of payment terms which would offer more flexibility. For unpredictable exchange

rates, currency swap arrangements could have been discussed.

Answer 5

The EMBR should avoid buying more contracts and instead they should focus on protecting their

legitimate earnings. This can be done by using a currency swamp which will allow them to enter

the price of those products at two U.S $ rates which will be different. This furthers confirms that

the hedging operating would not be a wise decision for the company in the given situation.

Answer 6

In the situation in which the EMBR would have a currency swap arrangement for the hedging,

the depreciation of the Brazilian currency would not really impact the company. On the other

hand, if they didn't have a hedging strategy there would have been several consequences. The

revenues when referring to the Real would have been increased while the purchases of different
Answers 5

parts would be higher than the ones listed in the budget expenses. All this would be presented

under the form of a windfall profit as it is more an unexpected gain from a circumstance

characterized by luck rather than an efficient strategy.

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