International Investment and Trade

Running head: INTERNATIONAL INVESTMENT AND TRADE
International Investment and Trade
Name
Institution

INTERNATIONAL INVESTMENT AND TRADE 2
Question: Discuss the exposure to currency risk that Material Hospitalar faces in its dealing
with Crosswell International and examine the methods of hedging it could engage with to
protect itself from this risk.
Introduction
Material Hospitalar, a distributor of healthcare products throughout Brazil, seek to
distribute Precious Diapers product manufactured by the U.S based Crosswell Company. The
trade between the U.S and Brazil is denominated by the U.S dollar. Therefore, Crosswell
would not be affected by currency risks. On the other hand, Material Hospitalar which would
be trading in the U.S dollar hence exposing it currency risk through transactions. Currently,
the exchange rate between the two currencies is 2.50 Brazilian real (R$) per U.S. dollar ($).
This study is composed of two sections. The first section discusses the currency risk the
Croswell is likely to be exposed to. While the second section discusses the hedging methods
that Crosswell can apply to protect itself from the impact of currency risks.
Transaction currency risk facing Crosswell
Currency risk arises from fluctuating foreign exchange rates which affect transactions
between two companies/ countries which use different currencies. The appreciation or
depreciation cause gains or losses for an organisation which directly impact its profitability,
market value, and net cash flow. Transaction risk occurs when a company has committed to
receive or make payments of its cash flows in a foreign currency (Buckley, 2018). In the
proposal, Material Hospitalar's deal with Crosswell is in U.S dollars hence the former would
suffer a currency risk. Sales made in the Brazil market would be converted from Brazilian
real to USD which would lead to financial losses. Transaction risk arises during the 90 days
waiting period when the order has to be processed and the full payment received (Buckley,
2018). Material Hospitalar will lose if the USD (foreign currency) strengthens against the

INTERNATIONAL INVESTMENT AND TRADE 3
Brazilian real (home currency) or the latter weakness against the former as illustrated in the
table below.
Spot Rate BRL
Received
from sales
USD
received
after
exchange
Current
Scenario
US$1= 2.5 BRL 948,156 379,262.40
After 90 days US$1= 2.9 BRL 948,156 326,950.34
At the current scenario, Material Hospitalar would receive 948, 156 BRL from full
sales of precious diapers in the Brazilian market. Using an exchange rate of US$1= 2.5 BRL
the amount is equivalent to USD 379,262.40. The trends in the finance market show that the
USD is likely to strengthen against the BRL. After 90 days, One U.S dollar is expected to
trade at 2.9 BRL. Therefore, the 948,156 BRL would be equivalent to USD 326, 950.34.
Material Hospitalar is likely to lose USD 52,312.06 as a result of the foreign exchange
(currency) risk (Madura, Hoque, & Krishnamrti, 2018).
Changes of the foreign exchange rates would exposure Material Hospitalar to
transaction risks. The company is likely to lose from the unpredictable fluctuation of the
exchange rates. Considering that the contract price is predetermined, there is little Material
Hospitalar can do to protect its future cash flows. However, hedging refers to a technique that
can be used by Material Hospitalar to minimise the probability of suffering losses as a result
of exposure to transaction risks. Although hedging is used to reduce the impact of transaction
risks, it won't benefit the two companies; Material Hospitalar would benefit at an expense of
Crosswell (Graham, 2014).