Academic Integrity: tutoring, explanations, and feedback — we don’t complete graded work or submit on a student’s behalf.

International Finance and Political Risk Choose a country (not the United States

ID: 2714741 • Letter: I

Question

International Finance and Political Risk

Choose a country (not the United States or Canada) BRAZIL is the Country . Then, identify some political and currency risks of that country and discuss why a U.S. company would invest (for example, build a factory) in that country. Also discuss some of the various international finance topics such as the foreign exchange market, purchasing power parity, interest rate parity, cross rates, and so on. Why is it important for international firms to understand these concepts?

Explanation / Answer

Brazil is the 6th largest economy in the world with a growing population. The country has varied and abundant mineral and agricultural resources. The country boasts of advanced manufacturing industrial sector in aerospace, chemicals, pharmaceuticals and engineering.

The country currently has a stable political system and the governments are stable. However there are higher amount of social imbalances. The contrast between the haves and have nots is very high which often results in social tensions. The social security is inadequate and the country is beset with high crime rate. The corruption of governments and its officials is a major point in almost all elections and is a major negative point in the economy.

Brazil is beset with very complex tax laws which are very difficult to understand and is a deterrent apart from the corruption for investments in the country. Though the country allows full convertibility and free repatriation (remitting back) of the investment and incomes, certain restrictions are imposed by some state governments like reinvestment of the amount for a certain period before repatriation or withholding taxes apart from those imposed by Federal government. These restrictions are not widely known and are prone for frequent changes. There are restrictions on foreign investments in the form of technology transfer, a certain percentage of the supplies or project requirements should be sourced from local resources which are often costly. As most of the Brazilian exports are commodities, the country’s fortunes are dependent on the world commodity prices and their direction. Though the foreign direct investments are high, there is very little investment from domestic entrepreneurs. This has resulted in a lopsided development.

Apart from these a foreign investor should also have knowledge of the following pertaining to the country.

The movement of interests over the period and their Central Bank policies, the development of foreign exchange markets and the movement of foreign exchange rates, whether there are instances of frequent imbalances between interest rates and foreign exchange rates resulting in huge arbitrage opportunities. Apart from this, they also should gain knowledge about the development of alternative markets like forwards, futures, options swaps etc., and the range of currencies generally traded for the hedging purposes.

Hire Me For All Your Tutoring Needs
Integrity-first tutoring: clear explanations, guidance, and feedback.
Drop an Email at
drjack9650@gmail.com
Chat Now And Get Quote