1. 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?
Overall economic development will play a crucial part in determining exchange rates, as well as political policy the government put in place.
2. Is a decline in value of the real against the U.S. dollar good for Embraer, bad for Embraer, or a mixed bag? Explain your answer.
It’s a mixed bag. The upside to the decline in the value of one real is you can buy more of the U.S. dollar. The downside is one of the Brazil prominent manufactures, buys parts for the planes from the U.S. Exchange revenues they receive from the U.S. will be compressed as they will not receive as much. This even out because the
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What kind of foreign exchange rate risks is Embraer exposed to? Can Embraer reduce these risks? How?
When exposed to a global crisis, people tend to flee towards the U.S. dollar which they view as a safe haven. This depreciates the value of the real, in the case of 2008, the real value dropped by 40 percent against the U.S. dollar. Embraer can reduce some risk by cutting back on currency hedging and not hedging most of their purchases on dollar sales.
4. Do you think Embraer’s decision to try and hedge against further appreciation of the real in the early 2000s was a good decision? What was the alternative?
Setting a predetermine exchange rate could have gone well for Embraer, if the real hadn’t continued to appreciate over the years. They could have waited longer before prematurely setting the predetermined exchange rate and then hedged.
5. Since 2008 Embraer has significantly reduced its dollar hedging operations. Is this wise?
It make their revenue unstable to the real vs dollar exchange rate. This is not a good idea because in 2012 the real appreciated against the dollar, pressuring Embraer’s revenues and the Brazilian economy had hit