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Free Float Exchange Rate

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Finance
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University of Sussex, Falmer and Brighton
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Running head: FREE FLOAT EXCHANGE RATE 1
Free Float Exchange Rate
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FREE FLOAT EXCHANGE RATE 2
Free Float Exchange Rate
Introduction
While multinational corporations have a significant competitive advantage over smaller
firms, they are exposed to foreign exchange risks. According to Kiymaz (2013), foreign
exchange risks entail the risk of losing out on profits in dollars based on unanticipated and
unfavorable movements in exchange rates. These losses merge because of the potential loss in
currency value of external markets in relation to the dollar currency. In the case of Partido
Switch Plc., its investments in Brazil face increasingly growing foreign exchange risks. The
adoption of a free-float exchange rate regime in Brazil from a fixed regime rendered government
interventions inexistent (Minella et al., 2003). Consequently, a free-float exchange rate regime
exposes the company to the risk of losing out on its investments in case of a depreciation of the
Brazil currency to the US dollar.
Motives for Free Float Exchange Rate Regime
Prior to 1999, Brazil used a fixed exchange regime that warranted interventions from the
Brazilian Central Bank (BCB). However, the institution of previous monetary policies pertaining
to foreign exchange management was detrimental to the country's economy. In turn, the
government adopted a free float exchange rate regime in the hope of achieving greater stability
in its economy (Holland, 2005). In particular, President Cardoso hoped to reverse the economy's
decline by setting it back on a growth path. During the last quarter of 1998, the Brazilian
government had received negative signs from the public with regards to its ambiguous goals and
absence of a clear resolve. In turn, the government hoped to use the new policy change to
provide a clear direction that would reassert credibility and stability in the economy.

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Running head: FREE FLOAT EXCHANGE RATE Free Float Exchange Rate Name: University Course Professor Date 1 FREE FLOAT EXCHANGE RATE 2 Free Float Exchange Rate Introduction While multinational corporations have a significant competitive advantage over smaller firms, they are exposed to foreign exchange risks. According to Kiymaz (2013), foreign exchange risks entail the risk of losing out on profits in dollars based on unanticipated and unfavorable movements in exchange rates. These losses merge because of the potential loss in currency value of external markets in relation to the dollar currency. In the case of Partido Switch Plc., its investments in Brazil face increasingly growing foreign exchange risks. The adoption of a free-float exchange rate regime in Brazil from a fixed regime rendered government interventions inexistent (Minella et al., 2003). Consequently, a free-float exchange rate regime exposes the company to the risk of losing out on its investments in case of a depreciation of the Brazil currency to the US dollar. Motives for Free Float Exchange Rate Regime Prior to 1999, Brazil used a fixed exchange regime that warranted interventions from the Brazilian Central Bank (BCB). However, the institution of previous monetary policies pertaining to foreign exchange management was detrimental to the country's economy. In turn, the government adopted a free float exchange rate regime in the hope of achieving greater stability in its economy (Holland, 2005). In part ...
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