Conduct an initial country risk analysis on the country Brazil
include the following in it:
a. Economic exposure
b. Translation exposure
c. Transaction exposure
Risk Analysis of the country Brazil:
a. Economic exposure
The economic exposure refers to the risks from the fluctuation of foreign exchange in context of Brazil.
1. The economic exposure of doing business in Brazil is high because of the fluctuation of the real. Between 2002 and 2006 the real fluctuated between 1.00 and 2.75 real per dollar.
2. Brazilian economic exposure is driven by the necessity to meet the debt servicing requirements of the country and the need to balance it with adequate exports.
3. The Brazilian currency has a reputation for unpredictable behavior; this unpredictability was very in the last decade when it became necessary to replace the cruzerio real in 1994 with the real. Even after conversion, there were downward movements of the real. The current upward movement is the first in the decade.
4. Even though the Brazilian economy is on an even keel because of large soy exports, debt servicing obligations can lead to sever oscillations of the value of real causing high economic exposure. For example if an investment is made at the rate of 1.00 R$ for a dollar and at the time of repatriation the exchange rate is R$2.80 per dollar, there can be a serious loss suffered by an investor.
b. Translation exposure:
The translational exposure of an investor arises because of the translation of financial statements of its foreign (Brazilian) divisions into U.S dollars,
1. The translational exposure will take place because of the change in both the R$ and the US dollar. Currently, there are changes in both USD and the R$, so the translational exposure is high.
2. Brazil has had a history of high inflation and so there were severe changes in the currency.
3. There have been currency changes in the past that is Cruzerios until 1986 were converted into Cruzado, again in two year ...
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