Assessment Financial Risk in Brazil - Essay Example

The paper “Assessment Financial Risk in Brazil" is a convincing example of an essay on macro & microeconomicsю In the contemporary business environment changes in the competition have become an obvious phenomenon. The companies that were satisfied by serving the domestic market are now more insistence to invest globally. The decisions of these companies to diversify their investments are based on the expectation that the expansion in the overseas market will benefit the companies in several ways that otherwise would not be possible by operating in the domestic market. In this regard, diversify investments to overseas markets is anticipated to contribute towards reducing compensation losses, extending products and services line along with increasing probability and lowering the overall risk. At the same time, investing overseas may not return adequate interest as expected by MNCs, when factors such as financial risk and other issues are not assessed meticulously. Thus, it is crucial to assess the Brazilian business environment, so that investment decisions can be made effectively. Otherwise, companies investing without adequate analysis may have to bear heavy financial and other intangible losses (Tabak, Guerra, Miranda and Souza 3-37). Against this backdrop, this paper will shed light on the factors influencing the investment decisions of MNCs in the Brazilian markets such as currency exchange risk, interest rate risk, and liquidity risk. In addition, the paper intends to determine measures to deal with factors having an adverse impact on the investment decisions of MNCs.  

EXCHANGE RISK
Fluctuation in the currency exchange rate is a serious issue for MNCs in the foreign markets to bear losses on the probable as well as future cash flow. Exchange risk, in general, is divided into three types including translation risk, transaction risk, and economic risk. Accordingly, translation risk is linked to a firm that needs to remit funds from its subsidiaries located in overseas. Hence, any price movement in subsidiaries, foreign currency exchange against home currency will appear in the financial statement as profit or loss. Next, transaction risk can be determined as the gap in the prices between the present date of a contract that is due in the future and the price when the contract is implemented. The differences in these prices can widely influence MNC's strategic plans and the impact of such risks can be more severe when such risk is not speculated prudently. Finally, the economic conditions can also have a serious impact on MNCs’ performance, especially in the long term. Retrospectively, the exchange rate movements are relatively changing based on economic conditions and therefore, the current and anticipated economic condition must be considered as an important factor while making investment decisions in the overseas market. Nevertheless, it is unpredictable for long-term investment, but MNCs can formulate measures to deal effectively with any probable economic uncertainties. It has been analyzed that for the last five years, the exchange rate from dollar to Brazilian real has been fluctuating constantly. However, the fluctuation can be seen in terms of increasing the exchange value of Brazilian currency from 1.82 per dollar in 2010 to 2.44 in 2014. This implies that US consumers are more willing to purchase from Brazil due to the reason that per dollar worth more and they are able to get more (Tabak, Guerra, Miranda and Souza 3-37).

INTEREST RATE RISK
MNCs usually have an issue with leaking funds of the budget to finance projects or in the circumstances where the exact cost estimation of a particular investment is not performed. In such situations, MNCs are involved in raising funds by issuing bonds to carry out their business operations. MNCs may also be investing in bonds to maintain cash flow ongoing or to hedge. Nevertheless, the risk arises from an increase in the interest rate, which causes bonds value to fall. According to BACEN, when the short-term (one year or less) interest rate increases while at the same time, the long term interest rate reveals constant and sharp changing trends, MNCs may expose to a high risk (Souza-Sobrinho, 3-47; HomeFinance, “BACEN SELIC Rate, Brazilian Central Bank’s Interest Rate”). (Source: HomeFinance, “BACEN SELIC Rate, Brazilian Central Bank’s Interest Rate”)

LIQUIDITY RISK
Liquidity risk relates to the ability of MNCs to get rid of its assets as well as losses that it will suffer as a consequence of their decision. In certain situations, MNCs may face difficulties to liquidate their asset instruments such as (stock, bond) or (land, equipment, vehicle).  Notwithstanding, the analysis of the Brazilian financial history revealed that the country has not experienced liquidity problems for long periods. Notably, it has been ascertained that after the financial crisis in 2008, the banking system started quick recovery and recorded a relatively high amount of liquidation in the first half of 2009. According to the first half of 2010, financial institutions in Brazil returned at par level of liquidity, as it was before the crisis. This shows the ability of Brazilian market effectiveness and strength in dealing with economic uncertainties. Therefore, there is a little liquidity risk for MNCs willing to invest in the Brazilian market (Silva, Sales and Gaglianone 3-67).

CREDIT RISK
Credit risk exposure is low when financial institutions have a good and long history of relationships with people who are constantly engaged in a transaction with it. On the other hand, the declining ability of the people to repay loans or credit often has an adverse impact on financial institutions, which forces these institutions towards bankruptcy. Nevertheless, credit risk exposure of financial institutions in Brazil has declined over the years. Brazil’s Central Bank (BCB) with the assistance of the ‘credit risk classification system’ has been able to monitor the financial system, which has reduced the credit risk in the country. Thus, credit risk in Brazil is not too high, which could be considered as a favorable factor for MNCs willing to invest in the Brazilian market (Stuber and Stuber, “Brazil: Credit Risk Rating in Brazil”).