Presentation

n What kind of currency risk does the Brazilian project pose to Nodal?

A risk, in this case, can be said to be any occurrence that can possibly hinder Nodal

from achieving its financial objectives. For instance, fluctuations in currency exchange

risks can result in failure by the organization to achieve said objectives. Nodal is facing

risks that are related to the currency used in the Brazilian market. Exchange rate

fluctuations are a form of economic exposure. As noted earlier, in the Brazilian

commercial real estate contracts may only be done using the real and Nodal uses dollars

in all of its other transactions. The dollar is one of the world’s strongest currencies. Also,

dollar is often stable and in recent years, the real has been increasingly stable as well.

Adding to that is the fact that Brazil has also becoming additionally resilient to changes

in the political environment. However, things could take a negative spin and the Brazilian

currency could depreciate against the dollar. Should the Brazilian currency depreciate

against the dollar then it would mean that organization might suffer losses a factor that

may hinder it from achieving its organizational objectives. For instance, when such

automatic changes in the economy as recession occurs the government is compelled to

lower taxes imposed on the consumers. The main objective of lowering the taxes is to

increase the amount of disposable income available to the consumers so as to increase

their purchasing power and hence increase the aggregate demand, which can possibly

help the economy to recover from recession. Should this occur in the Brazilian market, it

would mean that the Brazilian currency will depreciate against the dollar and hence the

organization will be the risk of failing to hit its financial objectives in terms of the

targeted profitability.

Along with the exchange rate risk, Nodal will also have to deal with the remittance

process, which as explained earlier is not an easy task. All foreign investors have to

register with the Central Bank of Brazil to be able to remit funds back to their home

country.

It is worth noting that the government is responsible for the economic growth of the

country and hence it is obligated to make discretionary decisions to manipulate the

economy in an attempt to ascertain economic growth. For instance, a government may

undertake discretionary contractionary fiscal and monetary policies as a course of action

to manipulate the economy. According to Mankiw (2014),

discretionary contractionary fiscal and monetary policies reduce the amount of disposable

income available to the consumers so as to reduce their purchasing power and hence

control the inflationary effect that is being experienced in the country. Though this may

work for the economy of the country, it can adversely affect Nodal Corporation should

the Brazilian government affect it. Reducing the purchasing power of the consumers will

mean that the consumers ’ability to afford industrial buildings will be reduced and hence

this will affect the market share available to the Nodal.

Another currency risk the Brazilian project poses is operating risk due to the fixed

assets they will own. Real estate is not a liquid asset. In the event that the company needs

to get sell their Brazilian property, it could take months or even years to convert to cash.

This subjects Nodal to a major operational risk. The rent earned from this property had to

be converted to dollars that meant the firm would face foreign exchange risk here as well.

n What are the primary management methods to be considered?

The primary management methods to be considered are as follow:

-The company could choose to do nothing and face the possibility of all risks

involved.

-They could also choose to use forward contracts.

-Another option is to use currency put options.

-They could also use currency adjustment clause to have their clients share in the

currency risk on both positive and negative changes of the exchange rate.

-Finally, Nodal could use currency swap.