1.American currencies’ devaluation because more than 1/3 of AES’s revenuesoriginated from Argentina, Brazil, and Venezuela. From 2001 to 2002, Brazil,Argentina, and Venezuela had $456 million in losses because of exchange raterisks. Converting these lower revenues resulted in a loss for AES as thedevaluation had a direct negative impact on the firm. This devaluation causedAES’s subsidiaries to default due to debt, which meant lower dividends and cashflows for AES overall.2.Forward contracts and long-term price agreements are similar because they bothagree to pay a set amount at a fixed rate and time. The long-term price contractswere equal to a short forward contract on electricity. An alternative to using long-term price contracts to hedge would be short-term price contracts. But thiswouldn’t be viable since it's difficult to find a counterparty willing enough toengage in such a contract, especially with the desired rate, size, and settlementdate.3.Hedging regulatory risk is difficult because no countries have the same rules andregulations. The government is constantly making regulations changes, which isdifficult to predict, so it’s even more difficult to hedge against. An example wouldbe a change in tax or trade policies. If the Brazilian government makes asignificant change in its tax policy, it will impact AES directly, and AES can’thedge against it since it wasn’t predicted. Changes are very concerning as AEScan lose revenues and investors without being able to hedge against it easily.4.The Brazilian Real and the Argentinian Peso depreciated severely, impacting AESdirectly. In Argentina, the newly elected government changed the old, fixed dollar-to-Argentine-peso exchange rate to USD-denominated loans in pesos. Thiscaused the peso to lose about 40% of its value, and the exchange rate was 3.32pesos per dollar. Similarly, the Brazilian Real depreciated by approximately 50%
