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on 5 February 2013

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Mini Case 5
Emily Casey
John Shewmake
Joe Tengel
Megan Zande The Venezuelan Bolivar Black Market 1) Why does a country like Venezuela impose capital controls? Create a financial analysis of Santiago's choices and use it to recommend a solution to his problem. Overview Economic Reasons:
To combat the downward pressure on the Bolivar
To safeguard stability of its financial system
Capital controls help prevent capital flight (rapid & potentially illegal transfer of currency out of the country)
Capital controls serve as a protective tool from the unstable international economy
Political Reasons:
To reaffirm Chavez's authority In the case of Venezuela, what is the difference between the grey market and the black market? Grey Market
Implicit rate: BS 2952/$
investor purchase company local KMTV shares on Venezuelan stock exchange, then convert into dollar-denominated ADRs traded on the NYSE
Black Market
Unseen & illegal
Unofficial rate: BS 3300/$
Investor deposit bolivars into Venezuelan stockbroker/banker account
Investor is then given access to offshore bank account holding US dollars
Exchange rate determined on day of deposit
No legal recourse if failure to complete transaction properly Santiago needs $30K to pay supplier bills
CADIVI app approved for $10K at BS 1920/$

Santiago's options for $20K shortage:
1) Grey market: BS 2952/$ X $20K= BS 59,040,000
2) Black market: BS 3300/$ X $20K= BS 66,000,000

Recommendation: Santiago should choose the grey market & save 6,960,000 Hugo Chavez elected president of Venezuela in 1998
January 21, 2003 Bolivar closed at a record low and inflation soared to 30%
In response to this, Chavez suspended the sale of dollars for two weeks
Venezuelans tried to exit Venezuelan market or did whatever they could to obtain the hard currency needed to run their businesses(capital flight) Venezuela Today Chavez terminally ill
Successor likely to be nominated in near future
Still facing double digit inflation & $70 billion deficit(22% of GDP)
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