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Case
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Reference no. A06-08-0012
Published by: Thunderbird School of Global Management
Published in: 2008
Length: 11 pages
Data source: Generalised experience

Abstract

Just when John Penman thought Nodal Logistics Corporation was ready to move into Brazil, a new hurdle was thrown in his path. Only a few days ago - on 11 December 2007 - he had finally obtained approval from the US-based company''s executive board to invest $45 million in an 800,000 square foot industrial property project in Sao Paulo, Brazil. But that was before yesterday''s phone call from the legal department. Nodal''s legal staff had received confirmation from their Sao 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 US 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 case is used in a graduate business class in international corporate finance to focus on currency risk management alternatives related to long-term / continuing transaction exposures. The case also provides an opportunity for students to learn the basics about real estate investment trusts. The primary objective, however, is to challenge the student to do a detailed quantitative analysis of a number of hedging alternatives, but focusing on a series of cash flows over time rather than a single transaction exposure.
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Abstract

Just when John Penman thought Nodal Logistics Corporation was ready to move into Brazil, a new hurdle was thrown in his path. Only a few days ago - on 11 December 2007 - he had finally obtained approval from the US-based company''s executive board to invest $45 million in an 800,000 square foot industrial property project in Sao Paulo, Brazil. But that was before yesterday''s phone call from the legal department. Nodal''s legal staff had received confirmation from their Sao 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 US 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 case is used in a graduate business class in international corporate finance to focus on currency risk management alternatives related to long-term / continuing transaction exposures. The case also provides an opportunity for students to learn the basics about real estate investment trusts. The primary objective, however, is to challenge the student to do a detailed quantitative analysis of a number of hedging alternatives, but focusing on a series of cash flows over time rather than a single transaction exposure.

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