How can Embraer use financial hedging to reduce its currency risk?
Questions
1. What factors affect Embraer’s operating exposure? Why did the real’s appreciation reduce Embraer’s operating profits?
2. Did Embraer decrease or increase its currency risk by hedging its dollar liabilities? Explain.
3. How can Embraer use financial hedging to reduce its currency risk?
4. Suppose that Embraer’s $608 million in dollar receivables mentioned earlier were outstanding at the beginning of the second quarter and that payment for $397 million was not received until the end of the quarter. The remaining $211 million was still outstanding at the end of the quarter. With an 18% real appreciation during the quarter, how much of a dollar loss would Embraer take on these receivables? In performing this calculation, consider that Embraer must first translate its dollar receivables into reais and then convert any loss measured in reais back into dollars.