case study 3

case study 3

1. Why does a country like Venezuela impose capital controls?
In case of the currency devaluation and downward pressures, Venezuela decided to carry on capital control. Due to capital control, Venezuela can keep a fixed exchange rate in a short-term without having impact on the foreign currency reserve. Additionally, capital control can help Venezuela maintains its cash inflow and outflow, which can prevent its wealth from outflow.

2. In the case of Venezuela, what is the difference between the gray market and black market?
For the gray market in Venezuela, it used the stock market to change the currency. It is legal but not official. People in Venezuela can convert the stock of CANTV into CANTV ADRs which is in NYSE. Seven shares price of CANTV on the bourse is equal to one share price of CANTV ADRs on the NYSE. Therefore, people in Venezuela can compute the exchange rate through the stock market, then convert their money through stock market. On the contrary, for black market in Venezuela, it was using the services of a stockbroker or banker in Venezuela who simultaneously held USD accounts offshore. The agreed upon black market exchange rate was determined on the day of the deposit, and usually was within a 20% band of the gray market rate derived from the CANTV share price.

3. Create a financial analysis of Santiago’s choices. Use it to recommend a solution to his problem.
Santiago needed $30000, but he only received $10000 at the official exchange rate which is Bs1920/$. However, the insider need an extra 500 bolivar per dollar. Therefore, the official exchange rate for Santiago is Bs2420/$. The grey market exchange rate is Bs2952/$. The black market exchange rate is the grey market rate plus 20%, so the price in black market should be Bs3542/$. In short, Santiago should choose the grey market to meet his need of dollar.

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