Brazil is the country in question: II. Financial Factors Affecting Expansion Dec
ID: 2659529 • Letter: B
Question
Brazil is the country in question:
II. Financial Factors Affecting Expansion Decision
a. What are the characteristics of the exchange rate regime in your country? Is the currency convertible? How high would you assess the likelihood of an exchange rate crisis?
b. Exchange rate forecast and correlation analysis
c. Does your country have a stock market? How many firms are on the exchange? Do firms list on outside exchanges (eg. an ADR on the NYSE)?
d. Obtain stock market data for your country if it has an equity market. What is the correlation of returns between your country and the U.S. market? What does this tell you, if anything?
e. What is the rating on the country
Explanation / Answer
a)In Brazil currently Brazilian real is used for exchange rate.
Yes Brazilian real is convertible as 1 Brazilian real= $0.42
Yes probability of having exchange rate crisis is very high in Brazil as Brazil is facing a hard time due to high currency which is destroying the trade of price sensitive goods.
b)Exchange rate forecast: Brazilian real has decreased to 2.40 in Feb.2014 from 2.41 in February 2014.It has acheived all time highest value of 3.95 in october 2002.
Source:http://www.tradingeconomics.com/brazil/currency
c)Yes Brazil has stock market BOVESPA.There are currently 106 firms on exchange.
Yes firm list on outside exchanges.
d)Correlation of daily price return between Brazilian market and Us market is currently 0.8 and hence this show that brazilian market is strongly linked to US market as it is close to 1 which signify that they are perfectly correlated.
Hence this show that the two markets are strongly linked.
Source:http://marketrealist.com/2012/10/high-correlation-of-ewz-with-spy-diminishes-diversification-benefits/
e)The rating is BBB.Yes it has changed in past five years.
Yes there is World bank loand on Brazil.
Source :http://www.standardandpoors.com/ratings/sovereigns/ratings-list/en/us
f)Default risk spread is currently 9.84%.Yes the spread has changed over last 5 years
SOurce:http://research.stlouisfed.org/fred2/series/INTGSTBRM193N
g)THe level of risk is very low on basis of fiancial and economical basis.There has been NO expropriations of foreign assets in the last 5 years.
In case of repatriation of profits,tax bills on the IRPJ income tax and the CSLL tax on net profits will be charged with a minimum payment of 25% in the first year, and the remainder over a five-year period.
Yes political risk insurance should be purchased and it is available from MIGA.
Source: http://online.wsj.com/article/BT-CO-20131112-711596.html
h)Local banks are very well sophisticated and Banking rules are strictly enforced, and all banking business is closely monitored by the banks themselves and by the Central bank of Brazil.
i)Yes I will raise capital and I can raise capital by stock and bond issues.
j)Yes concessions are necessary for entering into foreign market and I will surely demand tax breaks, and hiring workers from myr own country, and also demand that profits be repatriated at some favorable exchange rate