What it means
The real was introduced in the mid-1990s as part of a stabilisation plan that ended years of very high inflation. That history still shapes behaviour: Brazilian businesses index many contracts to inflation measures, and interest rates have tended to sit well above those in the United States or Europe.
As a floating currency the real can move a long way in a short time. It is sensitive to commodity prices because Brazil exports iron ore, soya, oil, coffee and sugar, and it is sensitive to global interest rate expectations because a lot of foreign money is invested in Brazilian bonds for their yield.
For an exporter selling into Brazil the practical issue is who carries that movement. If you invoice in dollars the Brazilian buyer carries the currency risk and may push back on price; if you invoice in reais you carry it yourself and need a hedge or a margin buffer to absorb a swing.
Hedging the real is possible but not free. Forward contracts price in the interest rate difference between the two countries, so a currency with high local rates tends to trade at a forward discount, meaning the forward rate gives you fewer dollars per real than today's spot rate.
Brazil also has its own set of local rules that catch newcomers. Cross-border payments pass through registered financial institutions, certain transactions attract a financial transactions tax, and funds leaving the country may require documentation that takes longer than the payment itself.
A final point of care is notation. R$ is the local symbol and is sometimes written next to a figure that a reader assumes is in dollars, so in any internal report the currency code BRL should be stated explicitly beside the number.
In practice
Real-world examples.
Example
A coffee trading house buys green beans priced in reais and sells roasted product in euros. It takes out a rolling forward contract each month so the margin it quoted to customers survives any move in the real between purchase and shipment.
Example
A software company opens a Brazilian subsidiary and starts invoicing local clients in reais. Its group finance team adds a currency translation line to the monthly management accounts so a weak real is not mistaken for weak sales performance.
Example
A fund manager buys Brazilian government bonds yielding well above domestic rates and leaves the currency exposure unhedged. The position makes money on coupons for two years, then gives back most of the gain when the real weakens, illustrating that a yield advantage and a total return are not the same thing.
Formula
Calculation
Amount in dollars = Amount in reais / Exchange rate expressed as reais per dollar
A supplier issues an invoice for R$ 500,000 and the market rate at the time is 5.00 reais per dollar, so the invoice is worth R$ 500,000 / 5.00 = $100,000. Payment arrives 90 days later, by which time the rate has moved to 5.50 reais per dollar, so the same invoice converts to R$ 500,000 / 5.50 = about $90,909. The currency movement has cost the exporter $100,000 - $90,909 = about $9,091, which is roughly 9.1% of the invoice value and more than many suppliers earn in net margin.Case study
Seen in the real world.
Dunhollow Instruments is an illustrative, entirely fictional maker of laboratory equipment that won a large tender from a Brazilian university group. To be competitive the sales team agreed to invoice in reais, worth about $1,200,000 at the rate on the day of the bid, with payment due in three instalments over nine months.
In the illustrative sequence of events the real weakened by roughly 12% over those nine months. The order still generated the agreed number of reais, but once converted the receipts came in about $144,000 below the figure used in the original margin calculation, turning a modest profit into a loss on the contract.
The company changed two things afterwards. It began hedging any order in reais above $250,000 with forward contracts at the time of signing, and it started quoting a rate validity period on every proposal so a bid could be repriced if the market moved before signature. The fictional point is simple: the currency decision in a tender is a pricing decision, not a paperwork detail.
Watch out
Common mistakes.
- Reading an R$ figure as though it were a dollar figure, which overstates revenue or costs by whatever the exchange rate happens to be.
- Treating a high local interest rate as free income, when the forward market already prices that difference into the cost of hedging.
- Quoting a long-dated contract in reais with no hedge and no rate validity clause, which leaves the whole margin exposed to the currency.
Questions
People also ask.
Is the real fixed or floating?
It floats, so the rate is set in the market, although the central bank can and does intervene when conditions become disorderly.
Should an exporter invoice in dollars or reais?
Dollars push the currency risk to the buyer and reais help win the order, so the usual answer is to invoice in reais only when the exposure is hedged or priced in.
Why does the forward rate give fewer dollars than the spot rate?
Because forward pricing reflects the interest rate difference between the two currencies, and Brazilian rates have generally been higher than dollar rates.
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