Nodal Logistics And Custo Brasil Harvard Case Solution & Analysis

What is a REIT

Real Estate Investment Trusts, REITs, are such trusts which invest in real estates and propose to investors a liquid method to invest in properties. In this way, they provide the opportunities to investors to buy their own property. Real Estate Investment Trusts earns revenues mostly from rents and leases. The tax structure of such trusts is also different from other businesses. As their major revenue is based on rents and leases therefore,REIT distributes almost 90% profits among the shareholders in the form of dividend. Therefore under operating such structure REIT do not pay taxes on income.

Nodal Logistics Interested in Entering the Brazilian Market

Nodal is a famous and large investment trust and its operations have spread worldwide. However,Nodal showed a slow response towards emerging markets in past. But this project is providing an opportunity to Nodal to spread its business in Brazil. Nodal wants to enter into the Brazilian market because Brazil’s population and economy are the largest in North America and it is expected that it will be a commercial hub and attractive option for the multinational firms.It is also a largest trading block among the countries which are present in North America.

Challenges does Nodal face entering the Brazilian market

In the past Nodal used to operate in US for its operations outside the America, by doing this Nodal minimized the transaction risk upon its cash flows from other countries to a great extent.However,this technique could not work to minimize the risk generated due to exchange rate fluctuation and the regulations imposed by the target country.

 However,entering Brazil is different because it is expected that according to the real estate law of the Brazil all the contracts will be done in Brazilian currency. According to this law Nodal is facing the currency risk along with the exchange rate risks. The level of these risks have also increased because most leases were covered between five to twelve years and being in the risk for such a long time it is also a serious problem for Nodal.

Entering in such a country whose economic conditions have been fluctuating in past and investing in such a business which cannot be moved to the home country is also a great challenge for Nodal along with currency and exchange risk for such a long period.

Kind of Currency Risk does the Brazilian Project Pose to Nodal

The risks faced by Nodal for this Brazilian project are long term transaction risk and operating risk and the exposure of these risks is also high. By dealing with the subsidiary in the subsidiary’s currency it is also increasing the foreign exchange risk because ultimately the cash flows need to be converted into Dollar. By entering in that market where economic conditions have been uncertain in past is also increasing the economic risk exposure of Nodal.

Primary Currency Risk Management Methods

Nodal can manage its risk by different methods of hedging in order to minimize its risk exposure. Nodal can remain uncovered to exchange rate and can convert its cash flows on spot rate in order to take the advantage of exchange rate fluctuation. Nodal can use the forward contacts and can enter into the forward rate in order to reduce the risk of exchange rate fluctuations by agreeing on a fixed forward rate. Nodal can also use the Put options, risk sharing agreements, money market hedging, local currency debt and cross currency swaps in order to reduce its exposure of risk.

Degree of Risk does Nodal Face if it chooses to Remain Uncovered

In last few years, the currency of Brazil has been showing an appreciation against the US dollar and it has been consistently increasing from last five years.Therefore,remaining uncovered to the exchange rate fluctuations could be favorable for Nodal however,the economic conditions of Brazil have been unstable as a result it could also prove to be harmful to Nodal and can cause the serious problems in future.

The Economist Intelligence Unit (EIU) is also suggesting that in the future the value of the real will fall in future.Therefore,according to their estimates remain uncovered to the risk could be a serious problem however;it also depends upon the risk appetite and behavior of the organization and also the materiality of the risk with respect to the organization......................

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