Question

CASE QUESTIONS
1.Why does a country like Venezuela impose capital controls?
2.In the case of Venezuela, what is the difference between the gray market and the black market?
3.Create a financial analysis of Santiago’s choices. Use it to recommend a solution to his problem.

Answer 1

1.Why does a country like Venezuela impose capital controls?-

A country like Venezuela that’s having its current currency devalued by its political reasons imposes capital control so that it can maintain a fixed exchange rate against any impact on foreign currency reserves. Also, this allows them to control the level and flow of capital in and out of the country. Since, the US$ is the most common currency to exchange in Latin America imposing capital control allows Venezuela to combat the devaluation of the Bolivar. Another reason is to increase their level of income equality so that all social classes are equal thus, benefiting many people in Venezuela that are below poverty. Lastly, with the political conflicts in the country causing instability in the currency value this control allows for stability.

2.In the case of Venezuela, what is the difference between the gray market and the black market?-

The gray market and black market are two methods to trade currency without using licensed and organized financial institutions, instead the trade online. Also, the grey market is not considered illegal nor is it considered legal it’s just inappropriate, dangerous and less risky. Unlike, the black market that’s considered illegal and heavily risky. The grey’s market implicit market rate was Bs2952/$ compared to the rate of the black market as Bs3300/$.

3.Create a financial analysis of Santiago’s choices and use it to recommend a solution to hisproblem.-

Santigago needs $30,000 in pharmaceutical products from his U.S.-based supplier.

CADIVI approved for $10k at the rate of Bolivars 1920 per dollar. Santiago paid extra 500BS/$ to fast-track his request from the CADIVI.

Santiago’s has the following options which he can exercise to raise bill shortage using $20.000

.Gray market: BS 2952/$ x $20.000 = BS 59.040.000

Black market: BS 3300 x $20.000 = BS 66.000.000

RecommendationsSantiago ought to pick gray market which is better option has he end up saving BS 6,960.000 if Venezuelans elect Hugo Chavez as president in 1998 elections.