1. Embraer exports to the United States (beginner). Embraer is a Brazilian aircraft manufacturer. It exports fifty 120-passenger jets to regional airlines primarily in the United States andWestern Europe. Sales contracts are US$ denominated and average $100 million per plane. Its book of future exports sales is projected as far as 2015 with average annual sales of US$3.5 billion. Many sales are still in the negotiation phase. In 2010 alone, the Brazilian real surged from BRL 2.1 to BRL 1.6 = $1. Embraer’s manufacturing costs are 80 percent domestic with the remaining 20 percent corresponding to imports.

a. What is the nature of Embraer’s exposure to exchange risk?

b. How would you advise Embraer to manage its exposure?