Dell Mercosur: Getting Real in Brazil

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Dell had expanded beyond PCs to servers, storage, and communications equipment Because of the softening of the global economy and the events of September 11, demand for PCs was down sharply Dell responded with an aggressive price strategy and reduced costs through workforce reductions and facility consolidations Dell bases its success on its build-to-order, direct sales model Because of the tariff-free provisions of Mercosur and the close proximity of Dell’s manufacturing facilities in the south of Brazil, Dell is well positioned to service all of Mercosur with its Brazilian manufacturing operations Dell’s revenues in Brazil are denominated in reals, and most of its operating costs are also denominated in reals Dell’s strategy is to hedge all foreign-exchange risk, which is a very aggressive hedging Since there is no options market for Brazilian reals, Pickett uses forward contracts to hedge the foreign exchange risks in Brazil strategy There are two key parts to the strategy:

forecasting exposure
designing and executing the strategy to hedge the exposure
Given how Dell translates its foreign currency financial statements into dollars, how would a falling Brazilian real affect Dell Mercosur’s financial statements? What about a rising real? Dell imports about 97 percent of its manufacturing costs. What type of exposure does that create for it? What are its options to reduce that exposure? Describe and evaluate Dell’s exposure management strategy. Build a graph on the value of the real against the dollar by quarter since the third quarter of 2002 using the spot rate at the end of each quarter. What has happened to the value of the real? Based on the change in the exchange rate, how would you evaluate Dell’s hedging philosophy and strategy? What are some programs or strategies that management of Dell Mercosur could implement to provide it with operational hedges?
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