Description
Read the case at the end of Chapter 10 in the text. Write your thoughts on these questions in the form of a Short Paper:
- What does the recent economic history of Brazil tell you about the relationship between price inflation and exchange rates? What other factors might determine exchange rates for the Brazilian real?
- Is a decline in value of the real against the US dollar good for Embraer, bad for Embraer, or a mixed bag? Explain your reasoning.
- What kind of exchange rate risks is Embraer exposed to? Can Embraer reduce these risks? How?
- Do you think Embraer’s decision to try and hedge against further appreciation of the real in the early 2000’s was a good decision? What was the alternative?
- Between mid-2014 and early 2015 the real depreciated significantly against the US dollar. What do you think the impact was on Embraer? Explain your reasoning.
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Introduction
Embraer is a South American based conglomerate that has its headquarters in Brazil. The
company has majored in the production of commercial, agricultural, and military planes. Despite
being based in Brazil, which uses the Real as its currency, Embraer has continued to use the
dollar to value its planes. As such, the company values its revenue using the dollar. Nevertheless,
the company reverts the revenue from dollars to its local currency (Real). The biggest challenge,
however, is that the company experiences uncertainties because the price rates keep fluctuating.
For instance, the company made losses es...