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IBT-07 Quiz 1

This case study examines how fluctuations in the value of the Brazilian real currency compared to the US dollar impacted revenues at Embraer. Embraer buys components from US suppliers in dollars and prices its aircraft internationally in dollars. Changes in the real's value therefore affected Embraer's costs and revenues. While hedging provided protection at times, it also resulted in losses for Embraer when the real depreciated contrary to expectations. Going forward, Embraer determined it would reduce hedging to avoid potential losses from incorrect currency bets.

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59 views

IBT-07 Quiz 1

This case study examines how fluctuations in the value of the Brazilian real currency compared to the US dollar impacted revenues at Embraer. Embraer buys components from US suppliers in dollars and prices its aircraft internationally in dollars. Changes in the real's value therefore affected Embraer's costs and revenues. While hedging provided protection at times, it also resulted in losses for Embraer when the real depreciated contrary to expectations. Going forward, Embraer determined it would reduce hedging to avoid potential losses from incorrect currency bets.

Uploaded by

Monique Balte
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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Embraer and the wild ride of the Brazilian Real Case

 Summary and Problems

This case study focuses on the effects of changes in the Brazilian real's value concerning
the US dollar on Embraer Company's revenue. Because Embraer buys many of the
components used to make its aircraft from American suppliers, changes in the exchange
rates between these two currencies hurt the company's revenue. Additionally, the
company lists the price of its aircraft in US dollars on the international market. As a
result, the business has decided to protect itself from the risks brought on by the real
currency's appreciation against the dollar. However, because of the economy's high rate
of inflation, the Brazilian real has lost a significant amount of value about the dollar
("Embraer and the Wild Ride of the Brazilian Real Case"). Embraer's issue in this
situation is the ongoing depreciation of the Brazilian real about the US dollar, which
renders the hedging operations ineffective. Embraer has chosen not to hedge its real
currency against the dollar at this time, which has increased its revenues when expressed
in real.

 Question Answers.

1. The connection between price inflation and exchange rates can be explained using
Brazil's recent economic history. Brazil has had significant economic issues at the start of
the twenty-first century, which have put the country's inflation rate and real exchange rate
in grave danger. Other factors, such as political unpredictability, financial instability, and
high unemployment rates, may affect the exchange rates for the Brazilian real in addition
to the country's high inflation rates. As a result, factors such as the persistent threat of
unemployment, political and financial scandals, as well as the inflation rates seen in the
Brazilian economy, have had a significant impact on the Brazilian real exchange rate.

2. Embraer's reaction to the real depreciation against the US dollar was conflicted; it was
both good and bad for the company's financial performance. For instance, Embraer
suffered a significant loss in revenue as a result of the real value's 40% decline against the
US dollar in November 2008. Because Embraer hedged by locking in a much higher real-
to-dollar exchange rate, the company lost 121 million U.S. dollars despite the
depreciation of the real value increasing its real revenues.
.
3. Embraer is vulnerable to a variety of risks associated with foreign exchange rates,
including transaction exposure and economic exposure. Embraer is exposed to the foreign
exchange risk of transaction exposure because the currency exchange rates have a direct
impact on the receivables obtained through the sale of its aircraft and the payables made
for the purchase of the aircraft manufacturing components.

a. The Embraer can lower its exposure to currency fluctuations by hedging its domestic
currency against a strong foreign currency. By hedging the weak Brazilian real
against the strong US dollar and thereby addressing the effects of the Brazilian real's
depreciation, the company has used the hedging technique to lower the foreign
exchange rate risks ("Embraer and the wild ride of the Brazilian real case").

4. The company did not make the best choice when Embraer decided to try and protect
against further real estate appreciation in the early 2000s. Only if there was assurance that
the Brazilian real would continue to appreciate would the decision to purchase the
forward contracts be appropriate.

5. Embraer made the right choice to drastically scale back its dollar hedging operations
starting in 2008 because doing so would spare the business from suffering significant
losses like the 121 million dollar loss brought on by a poor currency bet.

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