Mini-Case A Strong Real Hurts Embraer 
In August 2003, Empresa Brasileira de Aeronáutica SA (Embraer) of Brazil, the world’s fourth-largest aircraft maker, reported that net income had fallen by 87% for the second quarter, despite recent multibillion-dollar orders from JetBlue and US Airways, because of Brazil’s stronger currency and foreign-exchange hedging losses. Embraer President Mauricio Botelho said that the company was “strongly hit by two factors beyond our control.” He pointed out that the Brazilian real had appreciated by about 18% against the dollar during the quarter and that this had adversely affected Embraer. Embraer said that the appreciation raised its cost of goods sold, as well as its operating costs such as those for research and development and selling, general, and administrative expenses. At the same time, nearly all of Embraer’s revenue came from exports. Its primary competitor in the regional jet market, Embraer’s specialty, is Canadas Bombardier; to a lesser extent, Boeing and Airbus are also competitors. However, the biggest impact of the rising real came from $85 million in losses on currency swaps that Embraer used to convert its dollar-denominated liabilities into reais as a hedge. Embraer also lost money when Brazil’s main export-credit agency, BNDES, delayed paying for $397 million in outstanding receivables. By the time BNDES made the payment, the real’s strength meant that Embraer received fewer reais. In addition, BNDES had still not paid for $211 million of receivables for jets already delivered. Payments in reais are made at the spot rate in effect at the time of the payment.