Just when John Penman thought Nodal Logistics Corporation (NLC or "Nodal") was ready to move into Brazil, a new hurdle was thrown in his path. Only a few days ago-on December 11, 2007-he had finally obtained approval from the U.S.-based company's executive board to invest $45 million in an 800,000 square foot industrial property project in S o Paulo, Brazil. But that was before yesterday's phone call from the legal department. Nodal's legal staff had received confirmation from their S o Paulo-based associate that under Brazilian law, commercial real estate contracts must be denominated in Brazilian reais. One of Nodal's basic operating practices which had been so important to its international success had been to write all industrial real estate agreements in U.S. dollars. This posed a serious problem, as most industrial leases ranged from as short as five years to more than 12, and that was a very long time to be exposed to the Brazilian currency. John now had to delve into the multitude of strategies and derivatives that might allow the company to manage the currency risk; otherwise, the deal was dead. This is a Thunderbird Case Study.
Value of Net Income in 2009
Brazilian real-denominated loan
Per year Interest
Net Income After Interest- Paid to Bank
Sum of Net income in dollars
Brazilian Reais Spot and Forward Quotes
1. Why is Nodal Logistics interested in entering the Brazilian market and what special challenges do they face in regard to this move?
2. What kind of currency risk does the Brazilian project pose to Nodal?
3. What are the primary ways in which Nodal can try to manage this currency risk?
4. What degree of exposure would Nodal face if they chose to remain uncovered and to what extend can currency risk management alleviate this exposure?
5. What is your recommendation to John Penman? Other Teams: Prepare a one-pager on the following question: Assess Nodalâ€™s currency risk exposure and their options to manage it.