Financial analysis of expansion in Brazil

Your work for a multinational U.S. corporation has involved you in economic and financial analysis of foreign

countries. The firm had been contemplating a major expansion in Brazil, The firm produces for both the Brazilian and

the foreign export market. Given Brazil’s checkered economic past, several members of the senior management team

are questioning such a move. Your boss who had been pushing expansion has heard about the exciting things that you

have learned in Global Finance, and is now asking for your help. Write a five- to six-paged typed memo that

addresses the following questions. Graphs and/or statistical results can take up extra pages as needed.

In answering these questions rely on the theory you have learned, use the data provided and make your assumptions


The paper is an analytical exercise. I am not very interested, say, in what some else wrote about inflation and its causes

in Brazil, but in whether you can combine data and theory to arrive at conclusions on your own.

If you do consult outside sources, you are to follow accepted scholarly practices. Any material – arguments,

additional data, etc. – that you take from other work has to be footnoted and referenced. If you are taking material

verbatim you must indicate that by quotation marks. If you are summarizing someone else’s argument, a footnote or

text reference of the form (Dwyer, 1999) is generally sufficient. Failure to do so is plagiarism, a practice that will not

be tolerated.

Your answers are due on or before May 3. Please email your answers to me at Please include your

surname as part of the filename, as in something like “Jones_CIGPaper.doc” .

 Data are posted in an excel file.

(1) Inflation had been a major problem in Brazil historically. In recent years, however, it has been relatively low,

but has started to pick up.

(a) What explains the pattern of inflation historically?

(b) Make some assumptions about monetary policy and use the quantity equation to provide a forecast for inflation

over the next two years.

(2.) Real GDP growth has varied greatly over the period since 1975. Currently it is negative. What do you expect

it to be over the next two years and why?

(3) The Real per US Dollar exchange rate has depreciated over the past several years. A key to assessing the future

course of the exchange rate is the purchasing-power-parity relationship. How has relative PPP done as an indicator of

Brazilian exchange rate behavior both over the longer term and more recently? What does it suggest about the future

course of exchange rates?

(4) Short-term interest rates in Brazil have been in the low double digits in recent years while comparable US rates

have been even lower. What does this gap suggest about exchange-rate behavior?.

(5) Should the company go ahead with its Brazilian expansion plans? Why or why not?

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