int banking and finance

Table of Contents Executive Summary 3 1. Product Introduction 4 1.2 Country of Target 4 1.3 Distribution system 6 1.4 Employment 7 2. Factors that can affect Balance of Trade 8 2.1 Inflation 8 2.2 National income & Government restriction 9 2.3 Exchange rates 10 2.4 Factors Affecting the Demand for Your Product 11 3. Spot market 11 3.1 Bank for Foreign Exchange & Forward Market 12 3.2 Recent Exchange Rates 13 4. Monitoring Movements in the Foreign Currency's Value - What key factors likely affect the value of the foreign currency of concern over time? 14 4.1 Bottle Brighter Exposure 15 5. Monitoring Central Bank Intervention – Federal Reserve strengthen the dollar 16 5.1 If the Federal Reserve decides to weaken the dollar 17 6. Determining Whether IFE Holds 18 7. Exchange Rate Trends 19 8. Establishing a Subsidiary in Foreign Country 20 9. Assessing Exposure to Country Risk 21 9.1Financial factors that expose your business to country risk 22 9.2 Political factors that expose your business to country risk 23 Conclusion 24 Exhibitions 25 Work Cited 29

Bottle Brighter is a American company that wants to make people live a healthier life, and at the same thing about the environment and make sure that this generation takes care of it before passing it along to the next generation to come. Therefore, the company wants to decrease reusable bottle waste by offering an all natural product that encourage people to use water bottles or other containers more than once. The company offers a relatively affordable product that will last for approximately 31 days depending on how the consumer chooses to use the product. The country of target for Bottle Brighter is Brazil that consumes 12 billion liters annually (CRI). The challenges Bottle Brighter will face by entering Brazil is many such as high inflation and interest rate, low purchasing power, corrupt government, and a general decrees in the overall economy in Brazil. However, Bottle Brighter believes there is a need for their product in Brazil and is therefore, willing to take the chance of facing all these difficulties because they believe the future profit will be bigger than the cost at the moment. Bottle Brighter is aware of the marketing that is needed to bring awareness and inform customers how to use the product. The product will be sold for $15 as mentioned above and it is 57,5960 Brazilian real, the reason for the price is due to the high inflation in Brazil. The table below forecast the three following years in Brazil for Bottle Brighter (first staple year 1, second staple year 2, third staple year 3) and the company’s revenue and expense, a clearly operating budget for the three years can be seen further down the paper (exhibition 5).

Bottle Brighter is a company with a product that will help to clean used water bottles, or any other containers that can be filled with liquid such as thermos or baby bottles. This product will not only make bottles clean but as a consumer you will save money by not constantly buying new reusable liquid containers, and in addition to that this product is also environmental friendly. With that said, consumer that chose to buy this product will have taken one step closer to help the environment. The product is easy to use, all you have to do is to put the bottle cleaner effervescent tablet in the bottle of your choice with water and let it fizz. Then shake the bottle, pour it out, and it is ready to be reused. When purchasing Bottle Brighter one will receive 31 tablets in one package and it will sell for $15, which is 57,5960 Brazilian real. The company we have estimated that the package will last for around 31 days depending on how often a consumer decides to use it.

The foreign country Bottle Brighter has chosen to target is Brazil that has a population of “202,656,788 (July 2014 est.)” (CIA.gov). Not only is Brazil the largest country in Latin America, and brought a lot attention to themselves due to the World Cup 2014, Rio de Janeiro, and the Summer Olympic Games that will take place in 2016 that the company hopes to generate more profit from. Brazil is a part of the BRIC economies together with Russia, India, and China. According to the Container Recycling Institute Brazil together with China is the third country on the list of consuming most reusable liquid containers, Brazil consume 12 billion liters annually (CRI). Other reasons to why Bottle Brighter deiced to enter the Brazilian market is due to the fact that the country has both a large and diversified economy. Since Bottle Brighter is an American company it will have big opportunities to export the company’s products, which also means that Bottle Brighter will contribute to the United States export. Brazilian is a good choice for the company since the country has potential growth rate in the future as the seventh largest economy in the world (Trading Economist). Any import duties and taxes of a product will occur when Bottle Brighter’s product enter the country.

Another reason to why Bottle Brighter chose Brazil is because the country’s gross domestic product (GDP) “was 2346,12 billion in US dollars in 2014” (Trading Economist), which means that “Brazil represent 3.78 percent of the world economy”(Trading Economist). The country also has a GDP per capita of 2014 of 11,612.5 in US dollars according to the worldbank.com. As Bottle Brighter decided to enter the Brazilian market the company has been elaborated their knowledge in the environment in Brazil. This means that Bottle Brighter has learned about the direct and indirect costs on business in Brazil, which is also known as Custo Brazil. To receive this knowledge has been important for Bottle Brighter since it is connected to “distribution, government procedures, employee benefits, environmental laws, and complex tax structure” (export.gov).

Bottle Brighter believes there is a big need for this product in Brazil, and the high amount of reusable bottles annually proves that consumers in this country is in need for a product that can help them find a good way to reuse the bottles they have, and minimize the bottle water waste. Not only that, this product will help every household save money, which for many families will be seen as a huge advantage.

Bottle Brighter have chosen to distribute their product through boat. The company will distribute their product through boat, and this is because Brazil has a big port sector, and it is currently responsible for 90% of the country’s export and import (The Brazilian Business). Bottle Brighter knows that to have a good and efficient distribution system is very important. Therefore, Bottle Brighter will make sure that their distribution system has an efficient flow of the product from the supply inputs to the final distribution. To ensure this efficiency Bottle Brighter has a management team of their distribution networks. The management team is constantly doing analysis, and this is to make sure that there is production structure and to be aware of the viability of commercial transaction. The commercial transaction is the model flow of the products and the information that will help and be accessible for Bottle Brighter when it comes to any competition. The type of distribution Bottle Brighter will focus on is a short channel. The short channel will decrease the demand data and it forces bottle Brighter to have a working as well as sustainable communication, and the company understands the importance information being exchanged constantly with their employee’s in Brazil and with their target market and stores. Therefore, it is important to address the laws Brazil demands by imported products and foreign companies. In Brazil foreign companies have to have radar license that will be accepted by the Brazilian Federal Revenue also known as Receita Federaldo Brazil. Bottle Brighter have chosen to have the radar known as Radar Pessoa Entities, since that radar is willing to engage in foreign trade operations. Foreign companies also have to be “registered through Siscomex.”(The Brazilian Business), which is a Foreign Trade Integrated System. By being a part of this system companies will be given information about important factors when it comes to trade such as knowing the updated dates for cargo entering and exiting of the country (The Brazilian Business). However, Bottle Brighter also needs to have a contact company in Brazil for importing their product that company is Semco Partmers. As this is done the law also requires companies to have authorization by consenting agency, and the companies also need to have an import license from Siscomex. As the import licenses has been granted Bottle Brighter is able to import their product into Brazil.

When Bottle Brighter has address the laws on imports the company needs to address requirements at the Ministry of Health’s Regulatory, which is known as ANVISA that must approve Bottle Brighter since the product is related to health. The process at ANVISA will take up to six months, and when the company register full documents on clinical testing that has been performed specifically in Brazil is needed (The Brazilian Business). The company also has to address laws regarding taxation on imports to Brazil. An import tax in Brazil is called Imposto Sobre a Importaco and is also often referred to as abbreviation II. Bottle Brighter will be the taxpayer in this case. Since Bottle brighter is an American company, and the United States is not a part of the Mercosul Common Nomenclature a Tarifa Externa Comum often referred to TEC or NCM is applies (import tax).

For this product to be successful in Brazil Bottle Brighter have employees in Brazil that is acting as sellers on the behalf of the company. The employee’s main job is to sell the product into chains and stores, and bring awareness of the product. Since Brazil uses their own currency the Brazilian real also known as BRL Bottle Brighter will pay the workers in BRL, and as for the moment 1 BRL equal 0,318712 US dollars (Xe). The employees will be paid hourly and the hourly pay will be 45 dollars an hour, which is 172, 813 BRL (Xe). The employees will have a chance to improve their hourly paid by reaching different levels of sales that has to be reached, and the upper level division in the company has deiced this salary system. When an employee of the company reaches a sale of 850 dollars (3 264,64 BRL) the employee will increase his or her sale to with 25 dollars, which mean the employee will be paid 70 dollars an hour and that is 268, 840 BRL (Xe). Even though Bottle Brighter is an American company, the company wants to treat and pay their employees fair, which is more common in Europe and the company is therefore not paying their employees the United States minimum wage of $7.

As of July 2015, Brazil has a balance of trade surplus of 2.69 billion U.S dollars, and it has increased in comparison to last year when the country had a surplus of 1.17 billion U.S dollar (trading economics) see exhibition 1. Brazil is experience high surplus due their big export of agricultural products, however, since there is no product like Bottle Brighter product in Brazil the company believe they will become one of the country’s big importers. Brazil’s current account deficit is as of July 2015 at 6163 million US dollar and the foreign direct investment has fallen from 6.6 billion US dollar to 5.4 US dollar (Lima). As the country depreciated the currency, Brazil improved their export, decreased their import, and was able to improve their balance of trade to decrease their current account deficit (Lima). Exhibit 3 in will provide a table of balance of trade between Brazil and the United States.

Brazil has a high inflation at almost 9%, and it will affect balance of trade since it will make the price of the goods to increase, and it will also have an affect on the exchange rate, Bottle Brighter will find the currency more expensive but does not have a choice and have to purchase the currency any way. The high inflation in Brazil is causing the purchasing power of consumer to decrease since the prices continue to rise. In Brazil the minimum wage is incremented with the GDP as well as the inflation, and if the country would face a recession this would mean stop pay for many people who earn it and increase the gap between rich and poor. Inflation is a big factor affecting balance of trade since the high inflation causes prices to increase and this can either cause Bottle Brighter to benefit because if the company increases their price so does their profit. However, it all depends if consumer would buy the product for the higher price since inflation can result in consumer purchasing less, which in that case can affect the demand for Bottle Brighter’s product during the time of inflation. In addition to high inflation the country is also experience increased unemployment rate mostly because more of the Brazilian population are seeking education, increased inflation cause people to become more thrifty and think twice before buying a product. This of course will affect the balance of trade since the demand for Bottle Brighter might decrease because people believe it is more important to purchase something else when they have a small budget.

Of all the BRIC countries (Brazil, Russia, India, China) Brazil is the one with highest public debt, and it represent 66% of the country’s GDP, and 13% of it bonds. In 2013 the country’s national economy stopped, and had a gross national income of 2,430,000,000,000 (AL FRED), which resulted in almost no liquid of growth during 2014 and causing a forecast of decreased national income with 2.5% in the end of 2015.

As mentioned earlier in this paper, during distribution there are many regulations regarding a foreign country importing to Brazil, however, as Bottle Brighter address all those laws and regulations the company does not see that it will affect the balance of trade. The only way the import regulations and laws will become a problem for the company is if they do not address them but that will not be an issue since Bottle Brighter wants to enter the market correctly. The government in Brazil is improving their relationship with the United States and other international businesses to improve the trades and to stabilize the country’s macroeconomic. It is the government in Brazil that is the one purchasing most goods and services of both local and foreign companies, and if Bottle Brighter did not have a local presence in Brazil it is a big chance that Bottle Brighter would feel that they were in a disadvantage.

Exchange rates will also affect the balance of trade, and the company has done research and found out that there is no similar product as Bottle Brighter as a main export in the Brazil. What is being exported are big and clumsy sanitation, and this gives Bottle Brighter big advantage in both the market share as well as becoming the main export of this type of product. As mentioned above when Bottle Brighter enters the Brazilian market the company will buy the Brazilian currency known as Brazilian real. An important aspect that the company has to think about is how interest rates can affect any international value of currencies (Madura). Therefore, Bottle Brighter are entering the foreign exchange market to exchange the U.S dollar to Brazilian real since the employees in Brazil will be paid in their own currency. As supply for demand and goods shift so does the price for currencies. As Bottle Brighter have production expenses in U.S dollars, and will be working with that currency in many aspect of the business as well as Brazilian real it is important to compare the U.S dollar to the Brazilian real, which would result foreign exchange rate. The foreign exchange rate will help Bottle Brighter to know how much American dollars the company will have to give up to get a unit of Brazilian real. As the dollar is strong Bottle Brighter is buying a lot of Brazilian real, and Bottle Brighter is just one of many companies’ that purchase Brazilian real. As companies’ purchase a lot of Brazilian real that currency is appreciating, which makes the imports appears to be more expensive than it actually is. Even though the supply for the U.S dollars are increasing in the international market, which stabilizes the Brazilian real to fall.

The most important aspect of balance of trade that will affect the demand for Bottle Brighter will be the foreign exchange market between the currencies U.S dollars and Brazilian real, and the economy in Brazil. As Bottle Brighter is entering the Brazilian market, and the demand for the company product will come from stores in Brazil, those stores must enter the foreign exchange market. This is because when Brazilian stores place orders on the product they cannot send a check with the currency of Brazilian real. Just as Bottle Brighter have to enter the foreign exchange market to pay their employees with Brazilian real, a store must enter the foreign exchange market to buy U.S dollars that they can use to pay Bottle Brighter in return for their product. As of today July 20, 2015 when the dollar is strong it can have a negative affect on the demand of the product from Brazil. This is because as the dollar is strong the Brazilian buyer will see the U.S dollar to be too expensive, which causes the buyer to give up more of the Brazilian real to purchase dollars. This will affect the demand for Bottle Brighter in a negative way, since it might decrease the demand for the product and can result in trade deficit.

Since spot market is mostly influenced by supply and demand that is how Bottle Brighter will use it as well, and it allows the foreign exchange transaction to take place immediately. The company is with the help of Bank of America that they use for foreign exchange able to observe the spot market to see if there is any large discrepancy, and will immediately buy it from a bank that quotes a low price. Bank of America will not only act as foreign exchange dealer but also be responsible for the transaction-taking place. The reason for this is because Bottle Brighter wants to purchase Brazilian real for as a good price as possible since the company is paying their employees in Brazil in Brazilian real. As of July 25, 2015 the current bid and ask spread on a recent quotation by the bank for U. S dollars and Brazilian is bid/ask: 3,3504/3,3577 (Trading Economist).

The table below shows the spot rate for USD/BRL during the June 1, July 1, and August 1.

The bank Bottle Brighter will use to exchange U. S dollar to Brazilian real is Bank of America, which is one of the largest traders of foreign exchange. Bank of America offers the company Brazilian real for U.S dollar at any of their banking center or online if it will be more convenient. As a business and ordering online the Bank of America will not charge any fee, and as of July 25, 2015 the bank trade 1 USD for 3.6169 BRL, 5 USD 17.91 BRL, 150 USD for 537.44 BRL, 1,000 USD for 35882.95 BRL (Bank of America).

The company will be using forward market, and the forward market will allow Bottle Brighter to lock in the exchange rate (forward rate) that the company will buy or sell the currency. Bottle Brighter believes that using the forward market will benefit the company when buy Brazilian real in the future and at a specific exchange rate. By using the forward market it will allow Bottle Brighter to not be concerned with any fluctuations that occur in the spot rate. As of July 25, 2015 the current exchange rate is that for 1 U.S dollar will result in 3.6169 BRL. If Bottle brighter contracts to purchase BRL for 2,00000 U.S dollars and purchase it sixty days in the future it will purchase it for the current exchange rate, which is 3.6169*2,00000=7,233.80 instead of example 1 US dollar would equal 2.8581, 2.8581*2,000=5,716.2. Forward market will benefit Bottle brighter since it can help the company to not give up more US dollar for a unit of Brazilian real, especially since the Brazilian real have shown history of going up and down a lot during the last six months.

During the last month the USD/BRL has been showing signs of going up and down, it started at 3.401 in August 1, and then increased with 0.1842 and was at 3.5243 at August 8. Fours day later, August 12, the real decreased to 3.4571, to go up to 3.5031 at August 15. It went down to 3.4680 at August 22 to reach its so far highest point during August month at 3.6127. After overlooked the exchange rates from the last three months it is clear that the real has increased in value however, it is not as strong as the dollar. In the beginning of June 1, 2015 the USD/BRL value was 3.1784, and the lowest BRL went down to during the month of June was 3.0510. July 1, 2015, the real was at 3.1105, and the real was at weakest during the month of July on July 4 when it decreased to 3.1086. In August the real has continued to increase, and at August 1, it was at 3.3812 and reach appreciated to 3.6127 at August 26. In a course over a year the overall performance of the real has appreciated, it started off with 2.2344 on September 1, 2014 and has from there gone up and down but increased to 3.6127 on August 26, 2015. Exchange rate is an unstable market, however, the real has increased which means that Bottle Brighter should use the forward market and make a contract on the rate of USD/BRL before the real continue to go up and down, and will make the company pay more for s unit or Brazilian real, it is important since the company is purchasing Brazilian real to pay their employees in Brazil. This will benefit the company because if the Brazilian real is at 3.6127 it does not have to spend as much dollars when converting in comparison to 2.2344.

Factors that can affect the value of the Brazilian real over time are many, and the exchange rate can influence whether or not the company will be profitable or not. Two countries differences in relative inflation will affect the value of the Brazilian real, and as of now Brazil is experiencing a high inflation and the country is forecasting an inflation rate of 9% in the end of 2015 (Lewis). With higher inflation Bottle Brighter can expect Brazil to have higher interest rate, but also the company should expect the Brazilian real to depreciate during time in comparison to the U.S dollar. Differences in relative interest rate will affect the value of the Brazilian real as well, and because of the high inflation Brazil is experiencing the country has a rising interest rate of 14.25% (BBC News) (see exhibit 1). This high interest rate will offer the lenders in the country higher rate of return, and the high interest will in its turn attract foreign capital and it will make the exchange rate to increase.

Brazils annual exchange movement has through the last five years fluctuated up and down during different periods (see Exhibit 2). The Brazilian real was at its lowest during January of 2011 and was trade by the U.S dollar at a rate of 1.66613, and of January 2012 by comparing the two days but different years the currency had appreciated 0.1953, which lead the rate of Brazilian real to be 1.8566 January 1, 2012. In January 2013, the currency was exchange rate was 2.0325. During 2013, the real was decreased and appreciated frequently, and at January 1, 2014, the currency exchange rate was at 2.3765. It was not until January 1, 2015, as the real was exchange at a rate of 2.69441 but the currency continued to increase under the seven months of 2015, and the currency is now exchange at a rate of 3.8434.

Government regulation can affect the value of the Brazilian real over time, and in 2005 the government in Brazil made the regulations to make Brazilian foreign exchange easier for both Brazilian and foreign investors. This will help Bottle Brighter with cross boarder transaction; however, the government requires registration at the Brazilian Central Bank (BACEN) (Ernst & Young). The Brazilian government believes that the high annual interest rate in the country is going to appeal foreign investors, and the government tries to make the country a more market oriented economy and to make the tax system more easy. If Brazil would make their tax system easier it would facilitate the export process for Bottle Brighter. If the government would increase the foreign tax rate it would become more costly for Bottle Brighter.

Transaction exposure is something that might affect Bottle Brighter since the company is a MNC doing international business, and a change in the exchange rate often occurs after businesses enter their financial obligations. Transaction exposure might cause the company to have a large loss, and to eliminate the risk the company will be using forward market rate. The second exposure that could affect the company is translation exposure, which is when the company might have loss because of the changes that can occur in any of the factors such as the stock, assets, revenue, or even the liabilities in a company because of the movements of foreign exchange rate. Translation exposure will be shown on Bottle Brighter’s financial statement as wither a gain or a loss. The third exposure the company might experience is economic exposure, and this exposure comes from the unexpected changes in the exchange rate, and it comes from the unknown currency fluctuations that Bottle Brighter might have between the company’s future cash flow as well as the market value. Economic exposure can affect the company’s competitiveness in the market. As of August 17, 2015, the U.S dollar are stronger than the Brazilian real, and if the U.S dollar continue to appreciate against the Brazilian real it can have both negative and good affects for the company. The appreciation of the U.S dollar against the Brazilian real will make one unit of the U.S dollar will buy more units of the Brazilian real, however, since Bottle Brighter is exporting their product from the United States it will make the export of the product to Brazil more expensive.

Bottle Brighter can be affected if the Federal Reserve attempts to strengthen the dollar in the foreign exchange market, and as of August 2015 the U.S dollar is stronger than many other currencies. This is hurting the company when it is exporting its products to Brazil, and this is because the strong dollar will make it more expensive when it comes to export.

If the Federal Reserve would strengthen the dollar they might do it in fear of that the U.S economy is reaching full employment, which cause the demand to be excessive that cause inflation, and raise interest rates to help the economy to slow down. The Federal Reserve can address that by strengthen the dollar, and it would affect Bottle Brighter and the company’s export to Brazil. Bottle Brighter is receiving U.S dollar from Brazilian buyers that purchase the company’s product, and for Brazilian buyers to be able to buy Bottle Brighter’s product the companies’ need to convert their currency in order to buy Bottle Brighter product. As of August 20, the USD/BRL is traded at 3.50 BRL. For instance, if Bottle Brighter is selling $2,000 products it will be calculated by $2,000*3.50= 7000BRL. However, if the Federal Reserve strengthens the U.S dollar for instance, USD/BRL 4.50 the Brazilian companies will have to convert $2,000*4.50=9000 BRL in order to get the Bottle Brighter product.

Overall if the Federal Reserve would strengthen the dollar it would be more expensive for foreigner companies to buy Bottle Brighter products from the United States, and this will hurt the Bottle Brighter that export its product to Brazil, and it will also hurt the employee’s in the export industry. However, overall for the U.S companies this will decrease the export, and imports in the U.S will increase since the demand for U.S goods and services will fall. This might cause other businesses to compete against Bottle Brighter, and the competitive businesses will take advantage and sell their product cheaper, which can make it harder for Bottle Brighter to get the market share they want in the market. This can also make the inflation low because of the lower prices on the foreign goods.

If the Federal Reserve would decide to weaken the U. S dollar they will make it cheaper for Brazilian companies to purchase Bottle Brighter’s product and it can result in higher export for Bottle Brighter. A weaker dollar will make Bottle Brighter find it easier to sell the company’s product in the foreign market such as Brazil. Bottle Brighter can expect their export to increase, and if the company has more orders they can hire more people to meet their demand. Even though the company does not have a big competition within their market but if the company did have a big competition within the market from another company in another country with a different currency, a weaker dollar would create a less competition due to the lower price. By having a weaker dollar might cause the inflation to rise because there will be a less foreign competition within the market, and overall this can make it harder for Bottle Brighter to expand more in Brazil and enter other foreign countries because it will be higher prices on foreign products.

5.2 Indirect Central Bank intervention affecting your business Brazil intervene the central bank to control its currency in the foreign exchange market, and indirect central bank intervention can affect Bottle Brighter even if there is no impact on the exchange rates. Brazil decided to intervene because of the strong appreciation of the U.S dollar and how weak the real was in comparison to the U.S dollar. When a central bank does indirect intervention it most likely do so to focus on the interest rate. If the interest rate of the U.S dollar fall it will result in a lower flow of funds, which means that it will increase the demand for other currencies than the U.S dollars. If the interest rates in the U.S would continue to decrease it would not receive any capital, which in the long run could the company’s value. If the interest rate would increase it would create more foreign investors to invest their funds in the U.S to capitalize on the higher interest rates, and especially if the inflation rate is low. Indirect intervention will affect Bottle Brighter because it will make it financing costs to decrease, and borrowing will be easier.

The interest rate for the United States have been steady since the recession in 2008, and the interest rate has been at 0.25% (Trading Economics). The reason for a steady interest rate is because labor market is continuing to make improvements, and the unemployment rate is declining, and according to the Federal Reserve they will not tighten its policy until the organization see more progress in the labor market. Brazils interest rate has over the last year plus the two completed quarters of 2015 increased. Since of April 1, 2014 to July 1, 2015 the interest rate of Brazil has increased from 11% to 14,5%. The increased of interest rate is according to the Banco Central da Brasil due to the fact that the country is struggling with the rise of consumer prices. Brazil has an inflation rate of 9%, while the United States has an inflation rate of 0.2% and it has resulted in that the Brazilian real has weaker than the U.S dollar. This concludes that the international fisher effect is occurring between the two countries.

After evaluating the Brazilian real trend the last five weeks at oanda.com the currency has both decreased and increased. After monitoring the currency Bottle Brighter believes that the Brazilian real will continue to appreciate, since that is the trend the company could conclude after overviewing the currency during the last five week.

The company choose to look at the currency rate from a Sunday to a Sunday from the five previously weeks. The highest percent change of USD/BRL occurred during the fourth week out of the five-week evaluation. The lowest percent change during this five weeks against the U.S dollar was during the first week and it was July 12 to July 19 as the percent change was at -1.29% (Oanda). The highest percent change between Brazilian real and U.S dollar was 9.69% (Oanda), and that was at the beginning of week 4 August 9, the Brazilian real was a rate of 3.4808 and in the end of the week the currency was at 3.5528 (Oanda). This means that the currency appreciate with 0.072. It was during week 3 as the Brazilian real depreciates in the end of the week with 0.0135. Under week 3, August 2 the currency started at 3.4511 depreciated to 3.4376 on August 9 (Oanda).

The table below shows the exchange rates of the Brazilian real, and the percentage change of the Brazilian real against the U.S dollar. This is important since the company will purchase Brazilian real on spot and forward market. The table below will give a clearer picture of how the USDL/BRL trend has been over the last five weeks (see exhibit 4 for a clearer table)

To establish a subsidiary in Brazil will help Bottle Brighter to avoid the exporting costs to Brazil, and it will also help to separate the liabilities since Brazilian businesses have a different business culture than the United States business culture. For Bottle Brighter to establish a subsidiary in Brazil will help the company to see their customers or any additional partners more frequently, which will lead to building a successful structure. This is important because it will help if the current company has any financial problems it will not affect the existing business. From an accounting and financial perspective to establish a subsidiary will also allow Bottle Brighter to take enjoyment in the substantial tax benefits as well as the creditor protections. Bottle Brighter has chosen to have a subsidiary even though the cost involved to establish a subsidiary because the company believes the cost will outweigh in the future with the potential rewards. The subsidiary will help to achieve Bottle Brighter’s goal, and to make sure the company will achieve the goal, Bottle Brighter have company advisers that will structure the subsidiary’s way to the goal. The advisers will also help the company will avoid troubles with any federal taxes, employee salary and benefits, and other regulations (Diaz) that is different from the United States. Banco Nacional de Desenvolvimento (BNDES) often offers foreign subsidiaries a lower borrowing costs, which if they would offer is a big advantage since Brazil has high interest rates. The Banco Central do Brasil (BACEN) also give Bottle Brighter advantages with a subsidiary if all rules can be meet. BACEN control all the capital movements between foreign investor and Brazil, and has established rules and regulations that must be followed. For the foreign investor (Bottle Brighter) to make profit of the subsidiary, the subsidiary has purchase foreign currency (U.S dollar), and at the same time be able to prove that the subsidiary has been paying taxes and have a registration with BACEN (Diaz).

A disadvantage with subsidiary is that the subsidiary will stand on it own and the so-called parent, which will be Bottle Brighter in the United States have no legal obligation to help the subsidiary if it would be suffering. A big disadvantage is that receiving access to loans is much harder than in the United States. Brazil has a very high interest rate, which will make the country require more pledged collateral. This often cause the terms of the lender to be unfavorable than comparison to the U.S. Something that is both an advantage and disadvantage with having a subsidiary in Brazil is that Brazil has a ring-fencing regulations. These regulations does not allow the subsidiary to move funds to the parent company (Bottle Brighter in the U.S), but allow the parent company to fund the subsidiary in Brazil by example wise equity or debt (Narain). An employee disadvantage is that Brazilian labor laws only requires employees to work 44 hours a week and only 8 hours a day, which is significantly different from 80 hours a week in the U.S and where employees frequently work overtime. With this the subsidiary might have lower overall goal in sales in comparison to the U.S Company due to the reduced hours per week.

Before starting to establish business in Brazil, Bottle Brighter have to evaluate the many risks and challenges the company can face by the country itself. If the company does not evaluate the country risks the company can be affected by the risks and make Bottle Brighter lose on their investment. The two country risks that Bottle Brighter has evaluated is financial factors and political factors, these evaluating will help Bottle Brighter to develop an investment portfolio that the will make it possible for the company to both monitor as well as construct.

For a while Brazil had a low but stable economic growth, the country had increased of foreign trade, and a continuing inflow of foreign direct investment (FDI). However, today one of the financial factors that expose Bottle Brighter to country risk is Brazil’s economic growth, and as of the month of August 2015, the Brazilian economy is decreasing and its fiscal creditability is collapsing and is experiencing high unemployment. The fiscal policy in Brazil is becoming stricter because the government in the country is trying to primary deficit of the GDP to a surplus in the GDP during 2015 (GOV.UK). This is important for Bottle Brighter to be aware of since low economy can make consumer in Brazil purchase less, and the country’s GDP is at its low investment at 19 percent, while other countries within Latin American has an average of 23 percent (GOV.UK). The interest rate of Brazil is high at 14.25 percent (Business Insider), and this can cause to slow the demand for Bottle Brighter’s products in the country. The inflation in Brazil is at 6.5 Percent, and the according to the Central Bank in Brazil they are expecting the interest rate to decrease to 4.5 percent. The inflation plays a significant role in financial risk because it controls the purchasing power of consumers and how their demand for Bottle Brighter product will be. The inflation rate will influence both the interest rate as well as the currency value (Madura). When doing business in Brazil Bottle Brighter have to be aware of the high taxes and the high cost of labor. Brazil’s law system is different from the United States and much more complicated.

A financial factor that an expose Bottle Brighter to country’s risk is macroeconomics, and as of now there is a macro imbalance in Brazil. The ones in authority in Brazil have anticipated a surplus in 2015 with a 1.2% of GDP, and in 2016 a surplus of 2% of GDP (The World Bank). The current account deficit was 4.2% in 2014, which has caused Brazil to worsen its term of trade and it also decreased export from the country (Export.gov). The deficit has come from foreign direct investment; however, the country does not expect any radical crisis since the country has around $360 billion in reserve, which represent 17% of the country’s GDP (Export.gov).

The President Dilma Rousseff is currently in power and will be so for the coming quarters even though the political turbulence that has been present. Political Factors in Brazil that is worrying Bottle Brighter is corruption, and this has been a present issue in Brazil for years. The country has laws against bribery and corruption, however, it still occurs on the political level in the country. In the year of 2013, the Federation of Industries of Sao Paulo State (FIESP) found that around $53.1 billion were consider being corruption money in Brazil (Anderson). This has made the foreign exchange rules to allow both dividends as well as capital to go back to the investor that is stationed outside Brazil. However, some different laws around this can occur in different states. A Political factor concerning Bottle Brighter is that Brazil has been known to not have to strong laws protection companies and their product from counterfeits and piracy. This is important to for Bottle Brighter to know before to give the company a prospective in what the company might face. Therefore, it is important for the company to be extra careful when it comes to protection of the product. Liabilities are also considered to be a political factor that can expose Bottle Brighter for risk.

As Bottle Brighter enters the country the it will face many challenges with high inflation, high interest rate, decreased of purchasing power, government regulation, corruption, deprecation in the overall economy in comparison to the previous years. However, Bottle Brighter sees potential of growth and believe that after the first year the company will make a lost 1,066,590 of U.S dollars, the second year the company will make a profit of 12,590.6 US dollars, and the third year the company will break even with 1,774,419 US dollar. As the company is establishing themselves in Brazil Bottle Brighter has to be aware of the fluctuation of USD/BRL, and the company will get help from their bank by doing this as well. The company believes they will be successful in the country due to the fact that they will be unique within their market since there is no similar product like Bottle Brighter out there. Therefore, the company also believes that they will be successful in take the majority of the market share. As being unique in their market the company have to be aware of piracy that exists in the country, and protect their product against it as best as the company can. The country have laws against piracy, however, unfortunately they have not been able to protect other products within the country from being copied.

Challenges the company might face is the low consumer spending in the country due to high inflation and increasing unemployment rate. This can cause the company not to reach their goal of revenue, and which is something the company has taking into consideration for year 1. However, as a multination national corporation we believe in our product, and since the company’s sellers that are stationed in Brazil sells to business to business we will make ourselves known among companies that understand the importance and need for reusing bottles. However, in overall Bottle Brighter knows that entering the Brazilian market will require a lot of laws, regulations, and might be costly at first but the company believe that the future profit from being stationed in Brazil will be worth it.

Exhibition 1. Brazil’s interest rate (from tradingeconomist.com)

Exhibit 2. USD/BLR exchange rate (from Bloomberg.com)

Exhibit 3. Brazil’s Balance of trade (from tradingeconomic.com)

Exhibit 4. USDL/BLR Percentage change (from Oanda.com)

Exhibit 5. Operating Budget for 3 years

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