Mini case chapter 5 The Venezuelan Bolivar Black Market

Answer 1

Because an illicit market sprung up almost instantly after Chavez stopped selling dollars, the government established the
Exchange Regulations Decree to offset the bolivar's downward pressures. The first action enacted by the new law was to
fix the official exchange rate at a specific level, as a means of maintaining the country's level and capital flow by
stabilizing the bolivar's value and preventing arbitrary volatility, as had previously occurred. The second action was to
establish an organization to regulate the distribution of foreign exchange, which allows for better tracking of how much
is exchanged and a better understanding of the country's economic status. It's also good for preventing accidents and
illegal trades. Finally, in order to defend the economy and prevent inflation caused by a weak and fragile bolivar, severe
price restrictions were established. These restrictions would also assist to prevent import contractions, which might
occur due to the frequent fluctuation in the strength of the Venezuelan currency.

Answer 2

The grey market was a mechanism for investors in the Venezuelan stock exchange to get around the country's strict
foreign exchange controls. Given a legal gap, it was a lawful means to bypass the capital limits set by Chavez on acquired
dollars. This entailed buying local shares of CANTV on the Caracas stock exchange and then converting these into dollar-
denominated American Depositary Receipts securities listed on A Public Stock Exchange. The implicit rate in this market
was Bs 2952/$. The black market, on the other hand, was an unethical manner to get around those controls. It basically
involved using the services of a brokerage firm or money manager in Venezuela who already had money accounts
offshore, and the interested parties transferring bolivars to the banker's account so that he could later transfer U.S.
dollars. In this scenario, the unofficial rate changed by 20% of the grey market rate, resulting in a bs 3300/$ rate.

Answer 3

Santiago stated that he needs $30.000 in medicinal supplies from US-based providers in this scenario. Despite this, he
was having trouble getting the money since he had been added on the anti-Chavez list for signing a petition demanding
for his removal. Finally, because he paid CADIVI an extra 500 bolivars per dollar, he was able to secure permission for
$10.000 at the official rate of bs 1920/$. Now Santiago must figure out how to get the additional $20.000. He has other
options for getting hard cash, such as the grey and black markets. If he chooses the first option, with a price of Bs
2952/$, he will also have to pay Bs 59.040.000 for the $20.000. He would have had to pay bs66.000.000 for the same
$20.000 if he used the illegal market, where the value is bs 3300/$. Considering this, as well as the black market's lack of
assurances and security, it is strongly suggested that Santiago choose the grey market, as he would not only save nearly
bs 7.000.000, but he will also be certain of obtaining the amount he is buying for, with really no doubt of delays.

References
Moffett, M. H., Stonehill, A. I., & Eiteman, D. K. (2017). The Venezulean Bolivar Black Market. In Fundamentals of
Multinational Finance (6th Edition Global Edition ed., pp. 164-167). Pearson.