Embraer of Brazil is one of the two leading global manufacturers of regional jets. (Bombardier of Canada is the other.) Regional jets are smaller than the traditional civilian airliners produced by Airbus and Boeing, seating between 50 and 100 people on average. Embraer has concluded an agreement with a regional U.S. airline to produce and deliver four aircraft one year from now for USD80 million. Although Embraer will be paid in U.S. dollars, it also possesses a currency exposure of inputs—it must pay foreign suppliers USD20 million for inputs one year from now (but they will be delivering the subcomponents throughout the year). The current spot rate on the Brazilian real (BRL) is BRL1.8240 = USD1.00, but it has been steadily appreciating against the U.S. dollar over the past three years. Forward contracts are difficult to acquire and are considered expensive. Citibank Brasil has not explicitly provided Embraer a forward rate quote but has stated that it will probably be pricing a forward off the current 4.00% U.S. dollar eurocurrency rate and the 10.50% Brazilian government bond rate. Advise Embraer on its currency exposure.

Embraer of Brazil is one of the two leading global manufacturers of regional jets. (Bombardier of Canada is the other.) Regional jets are smaller than the traditional civilian airliners produced by Airbus and Boeing, seating between 50 and 100 people on average. Embraer has concluded an agreement with a regional U.S. airline to produce and deliver four aircraft one year from now for USD80 million. Although Embraer will be paid in U.S. dollars, it also possesses a currency exposure of inputs—it must pay foreign suppliers USD20 million for inputs one year from now (but they will be delivering the subcomponents throughout the year). The current spot rate on the Brazilian real (BRL) is BRL1.8240 = USD1.00, but it has been steadily appreciating against the U.S. dollar over the past three years. Forward contracts are difficult to acquire and are considered expensive. Citibank Brasil has not explicitly provided Embraer a forward rate quote but has stated that it will probably be pricing a forward off the current 4.00% U.S. dollar eurocurrency rate and the 10.50% Brazilian government bond rate. Advise Embraer on its currency exposure.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter14: Multinational Capital Budgeting

Section: Chapter Questions

Problem 1BIC

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Embraer of Brazil is one of the two leading global manufacturers of regional jets (Bombbardler of Canada is the other). Regional jets are smaller than the traditional civilian airliners produced by Airbus and Boeing, seating between 50 and 100 people on average. Embraer has concluded an agreement with a regional U S airline to produce and deliver four aircraft one year from now for $78 Million. Although Embraer will be paid in U.S. Dollars. It also possesses a currency exposure of inputs- it must pay foreign suppliers $15 million for inputsone year from now (but they will be delivering the subcomponents throughtout the year). The cuurent spot rate on the Brazilian real (R$) is R$1.87/$, but it has been steadily appreciating against the US dollar over the past three years. Forward contracts are difficult to acquire and are considered expensive. Citibank Brasil has not explicity provided Embraer a forward rate quote, but has stated that it will probably be pricing a forward off the…
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