If you want to speculate, you should not do it with corporate resources,
you should move to Wall Street, that's how I like to describe this.
The CFO should move to Wall Street.
The question 2 is a little more elaborate example of about currency risk.
The situation where a company is making this investment in Brazil, but
the investment needs to be approved by the government.
So the immediate risk that you face is that
you have the exposure to this payment in Reais, right?
So this is an exposure that means that what will happen is your payment
might increase if the Real appreciates in value.
As we saw in module three,
the Real can actually change very sharply in a short period of time.
So payment could easily go up 20, 30% in a short period of time, okay?
So the options of course,
one option in this case is to hold cash in advance, as I have here, right?
You can hold Reais in advance, so if the Real appreciates, you don't care anymore.
Or you can try to profit from the appreciation of the Real by buying
Real futures, and here's something interesting.
This is one of the most interesting questions of this assignment, right?
So now we are in a situation where the Real depreciated, okay?
So your future position didn't make money, and the investment wasn't approved.
So all you had is the loss on your derivatives position, or
your loss on your long position in Reais if you're holding Reais on the other way.
So the key thing is I think that the company did not necessarily
make a mistake, you weren't sure if the government were going to approve or
not but think about it.
You would have been in a much worse situation if for
some reason the company had not been able to make the required investment because it
had been too expensive, rtight?
If the investment became too expensive for the company, because the Real appreciated.
Then you cannot make the investment made because you can't raise financing, right?
There would be really costly or
losing this valuable investment opportunity because of currency risk.
On the other hand, the only thing you lost in the current situation
where the government canceled it.
The only thing you lost is your trading profit and that shouldn't be a big deal.
The CFO should be able to explain to investors that there was a good reason why
the company was hedging the Reais.
And now the question is what happens, suppose the investment is approved, right?
What changes?
So now of course the exposure changes, right?
Now the company is exposed both on the revenue and the cost side.
Because you are producing in Brazil,
you're selling in Latin America including Brazil but also in other countries, right?
So what you need to think about using the framework we developed in module three is,
how are the Latin American currencies going to move together.
And the key idea here is the idea of natural hedge.
So suppose that you're selling in Argentina and producing in Brazil.
If the Argentinian peso and the Brazilian real move head to head,
then your costs and revenues are going to change together and
maybe you don't have to worry about currency risk, right?
So it would be interesting if you could come up with that on your own.
However, it may be the case that these relative movements still matter.
It may be the correlation between the Argentinian peso and
the Brazilian real is not that high.
So you may still want to hedge against these relative movements.