Question

Keller & Linstead Inc. specialize in importing tropical fruit (mainly bananas). Keller & Linstead buy high-end, top-quality tropical fruit in South America and sell it to Kroger in Cincinnati. The Northern Kentucky-based company is thinking about buying a fruit processing plant in Brazil. Which of the following statements is true?

Both statements are correct.

A current appreciation of the Brazilian Real (BRL) would make the future acquisition of the processing plant more expensive in USD terms. However, this is offset by Keller & Linstead’s positive (long) FX operating exposure to the BRL due to their fruit import activities.

Both statements are wrong.

If Keller & Linstead expect an appreciation in the value of the BRL, they should hedge their negative (short) FX operating exposure to the BRL. This would also help the company with their future acquisition of the processing plant.

Answer 1

Both statements are correct

Appreciation of BRL would make the future acquisiob of processing plant more expensive in USD terms. A company can offset some of its FX currency exposure by moving its operating expenses to the foreign currency, which the company has already done, since they are already operating in Brazil. This limits their FX currency exposure.

The company should hedge their FX expsoure as they expect the BRL to appreciate. This will also help the company with their future acquisition of the processing plant.since by hedging the company could limit the losses due to BRL apprecation.