CASE STUDY : AIRBUS FOREX BRAZIL

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Varig, the Brzilian flag carrier, signs today a contract with Airbus Industry for the purchase of 3 A321 aircrafts for its medium-haul fleet modernisation programme (March1st). The contract value is 500 million dollars. On the same day (March1), Airbus Industry delivers the three A321 aircrafts to Varig. Powered by CFM International CFM56-5 engines, Varigs A321s feature spacious and comfortable two-class cabin layouts seating 170 passengers including 20 seats in a fixed business class. The airline plans to operate these aircraft in South America and in Brazil. Varig was the first Airbus customer and operator in Brazil, putting an A310 in service in 1992. The airline currently flies to almost 90 destinations worldwide and in Brazil. Airbus Industry will be paid 3 months later in Us dollar.

Part 1 1 As an international finance manager working for Airbus Industry, you are asked to briefly present the products of the EADS group, their relative market shares and the financial results (income statement) of the group as well as their hedging strategies

2.You hesitate to hedge the currency risk, but finally decide to look at the currency trend in the last three previous months. Days 1 USD = e EUR DEC 3 0,9065 DEC 18 0,8865 JAN 5 0,8869 JAN 15 0,9102 FEB 4 FEB 10 0,8823 0,8711

Today (on March 1) the spot rate for the USD/EUR rate is : Spot T0: 1 USD = 0,8165 / 0.8185 EUR What should you do ?

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3.Assuming you decide to hedge your currency risk on the forward foreign exchange market, how many Euros should Airbus Industry get per Us dollar ? Relevant quotation on March 1: 1 USD = 0,8165 / 0.8185 EUR 3 month EUR = 3% - 31/16 % 3 month USD = 5 15/16 % - 6% 4.Does the interest rate theory (IRPT) hold ? 5.Briefly, a. Recall the USD/EUR trend over the last few years b. Explain why the USD/EUR forecast is so carefully watched by EADS c. Assess possible economic risks & eventually make suggestions to manage them PART 2 Airbus has to buy for 100 Million US Dollars of raw materials. The payment will take place in 3 months. Assuming the firm decides to hedge its currency risk on the forward forex market, how many Euros should it pay ? Relevant quotation on march 1: 1 USD = 0,8165 / 0.8185 EUR 3 MONTH EUR = 3% - 31/16 % 3 MONTH USD = 515/16 % - 6% PART 3 The Financial Times is seeking this year to prepare a new regional survey, focusing on Brazil. The journalist in charge of this survey contacts you considering your knowledge of the Brazilian market. 1. What is the current financial situation in Brazil this year? 2. What has been the nominal USD / Real trend in the last few years? What can be anticipated ? 3. Globally assess the opportunity & risks of doing business in Brazil. (Refer to the following annexes and add data from websites & research papers (graphs, figures, analyses). Quote the most important references (dates & sources), supporting your analysis).

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ANNEXES
ANNEX 1 : WEBSITES (selection) ozforex.com bis.org ft.com economic-research.credit-agricole.com economic-research.bnpparibas.com worldbank.org cofacerating.com doingbusiness.org deutschebank.de rime.ccip.fr/ (HEC) worldbank.org transparency.org ebiblio.sciences-po.fr (EPSCO / Business Source Complete)

ANNEX 2

Financial Times

Trade war looming, warns Brazil

By Jonathan Wheatley and Joe Leahy in So Paulo Published: January 9 2011 21:30 | Last updated: January 10 2011 00:02

Brazil has warned that the world is on course for a full-blown trade war as it stepped up its rhetoric against exchange rate manipulation. Guido Mantega, finance minister, told the Financial Times that Brazil was preparing new measures to prevent further appreciation of its currency, the real, and would raise the issue of exchange-rate manipulation at the World Trade Organisation and other global bodies. He said the US and China were among the worst offenders. This is a currency war that is turning into a trade war, Mr Mantega said in his first exclusive interview since Dilma Rousseff, Brazils new president, took office on January 1. His comments follow interventions in currency markets by Brazil, Chile and Peru last week. The actions have renewed interest in how to manage destabilising flows of speculative money, with the International Monetary Fund suggesting last week that the world needed rules to govern the use of capital controls. Mr Mantega, finance minister since 2006, coined the term currency war in September before launching controls on foreign portfolio investments in Brazil aimed at stemming an increase of 39 per cent in the real against the dollar over the past two years. He said that most International Finance / Eric Griette This document cannot be used or reproduced without permission 4

of Brazils measures last year were directed at the spot market but the focus had switched to the futures markets, which he said were now behind the upward pressure on the currency. He said currency manipulation would be on the G20 agenda this year. Brazil would also lobby to have the WTO define exchange-rate manipulation as a form of veiled export subsidy. Any attempt to change WTO rules to incorporate exchange rates would be difficult, however, as China could be expected to veto it, analysts said. Mr Mantega said that Brazils trade with the US had slipped from an annual surplus of about $15bn (9.6bn) in Brazils favour to a deficit of $6bn since the US began trying to reflate its economy through loose monetary policy. He said Chinas undervalued currency was also distorting world trade. We have excellent trade relations with China ... But there are some problems ... Of course we would like to see a revaluation of the renminbi. Copyright The Financial Times Limited 2011.

Financial Times Nations try to cool hot money

By FT reporters Published: November 20 2009 02:00 | Last updated: November 20 2009 02:00 A string of countries have edged towards imposing capital controls to stop short-term speculative inflows driving their currencies higher amid concerns about the growth of an emerging market asset bubble. Yesterday Brazil, which surprised the markets a month ago by imposing a 2 per cent tax on the inflow of money destined for financial assets, said it would further tighten those restrictions. The finance ministry imposed a new 1.5 per cent tax on the issuance of depository receipts, assets that allow Brazilian companies to offer shares on foreign exchanges. The move comes amid a flurry of miscellaneous policy changes by emerging markets, designed to slow inflows of foreign money, and comments from public officials about capital controls. Economists said that while most of the moves were modest, they did underline the challenges many emerging markets faced in trying to prevent both rapid appreciation against the dollar and the inflation of asset bubbles. "This is a policy dilemma common to many countries," said Gerard Lyons, chief economist of Standard Chartered bank. "It all links back to the CNY [Chinese renminbi]." With the renminbi pegged to the dollar, despite pleas from Washington to let it float, emerging market currencies climbing against the greenback also rise against the Chinese International Finance / Eric Griette This document cannot be used or reproduced without permission 5

currency, making companies less competitive against China's low-cost manufacturers. Last week Taiwan imposed restrictions on overseas investors placing funds in time deposits. Financial markets have been on the alert for any country following Brazil and Taiwan's lead. "Recent measures from Brazil and Taiwan curbing capital inflows send a clear signal: emerging market policymakers are far away from accepting a sustained reallocation of portfolio capital from the west, and its liquidity and currency implications," said David Bloom at HSBC. Yesterday, a significant number of Asian currencies fell against the dollar after senior officials in India, Indonesia and Thailand spoke publicly about the possibility of intervening to restrict flows of hot money in search of high yields. In India, Ashok Chawla, finance secretary, said the government might take steps to slow capital inflows if foreign investments surged, because of exporters' concerns that a stronger currency would reduce their international competitiveness. Capital controls have a mixed reputation among Asian emerging markets. The surprise imposition of restrictions by Malaysia in 1998 during the Asian financial crisis has been credited by some with keeping it relatively immune from the aftermath of the meltdown. But controls imposed by Thailand in 2006 during a political crisis sparked the largest one-day fall in Thailand's stock market. Reporting by Alan Beattie, Kevin Brown, Peter Garnham, Jonathan Wheatley and Song Junga

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