A simple strategy to manage risk in FX with brazilian partners

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As Italy is one of Brazil’s top largest global trading partners, in this competitive country, for an Italian exporter may be more advantageous invoicing the products in the importer’s currency Brazilian Reals (BRL), instead of shifting exchange rate risk to their counterpart. To do that, the exporter need to eliminate the FX risk through appropriate hedging. For example, an Italian exporter sell products to a Brazilian importer for 278,000 Brl (equivalent to 50.000 Euro) payable in August ’23. The current BRL/EUR rate Future (TICKER:EUR) listed to BM&FBOVESPA, with expiration on August ’23, is sell to 5,640.00 Brl per 1,000.00 Euro. By converting the invoicing currency in Brazilian Real, the exporter is now exposed to a weaker importer currency (BRL). If the BRL goes down in value versus the Euro, when the exporter will convert back to his domestic currency, he will receive fewer Euro, cutting part of his return. As shown in the BRL/EUR Future chart, Euro could get stronger against Brl if it will broke the resistance at 5800.



In this case, the FX transaction risk can be easily hedged using standard futures. The exporter has to buy 1 future contract. This means our Italian exporter would buy 1 BRL/EUR Future at price of 5,640.

In case of weakens scenario for BRL, the importer can subtract the gain from the hedge position from the loss resulting from the currency rate change results. It may ends up with no damage in this trade exchange!

Edoardo Liuni