Question

Embraer of Brazil. 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 $80million. Although Embraer will be paid in U.S.​ dollars, it also possesses a currency exposure of inputs—it must pay foreign suppliers $17million for inputs one year from now​ (but they will be delivering the subcomponents throughout the​ year). The current spot rate on the Brazilian real​ (R$) is R$1.8227​/$, 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 3.00​% U.S. dollar eurocurrency rate and the 11.50​% Brazilian government bond rate. Advise Embraer on its currency exposure.

How much of net cash position in Brazilian reais will Embraer receive in one year without a hedge if the expected spot rate in one year is expected to be R$1.8227​/$?

R$ ___(Round to the nearest whole​ number.)

Answer 1

Embraer will receive $80 million after 1 year.

Similarly, it should pay $17 million for inputs after 1 year.

So the net cash to be received after 1 year = total receivables - total payables = $80 million - $17 million = $63 million

The expected spot rate after 1 year = R$1.8227​/$

So the net cash position in brasilian reals after 1 year without a hedge would be = $63 million * R$1.8227

= $63,000,000 * R$1.8227

So the net cash position in brasilian reals after 1 year without a hedge would be R$114,830,100.