McCabeArticle+and+Diary

= A matter of interest rates =

BY GARY POKRASSA, CPA FEBRUARY 2012

I am CFO of Lakeland Industries Inc., which acquired a Brazilian company in 2008. I have been intimately involved with the Brazilian operations ever since, and I would like to comment on the excellent article “ [|Business Basics in Brazil] ” (Nov. 2011, page 34). In the section addressing exchange rate risk, the interview subjects point out that “[t]he most common contracts are future, forward, options and swaps. Operations with derivatives can be done through major banks.”

While it is absolutely true that these contracts are readily available, the subjects do not address the cost of these forward contracts. The cost of a forward foreign exchange contract is mainly determined by the interest rate differential between the two country currencies. At the time of closing in 2008, I had extensive discussions with the FX (foreign exchange) departments of several major U.S. banks, and my Brazilian people had similar discussions with several Brazilian banks about a net investment hedge. All returned the same answer: Due to the interest rate differential, the hedging cost is prohibitive. Nothing has since changed the dynamics.

In hedging against the Canadian dollar, euro, etc., the interest rates in each country are fairly comparable, and the forward rate in a hedge contract may not be very different from the spot rate plus a few basis points for the bank. Whoever takes the long position in Brazilian reais to offset the short position we would need in a hedge is essentially committing to pay a fixed amount in a period fixed by the contract. This requires essentially borrowing in the local currency to avoid the bank’s assuming FX risk itself. Over the last three to four years, there has been at least an eight-point differential, which means it would cost more than 8% per year just to stay even with a hedge. We decided over the long term it would make more sense just to keep our long position.

If there are any borrowing needs, if it is done in Brazil in BRL-denominated debt, this will also act as a natural hedge.

Another comment I would have is that, while the interviewees clearly mention corruption as an issue in doing business in Brazil, I believe it is far more pervasive than implied by the article and is the single biggest obstacle my company faces in doing business in Brazil. The problem is magnified for a U.S. company that has to comply with the Foreign Corrupt Practices Act and Sarbanes-Oxley Act while competing against Brazilian companies that clearly see corruption as part of doing business. But, this is probably an interesting topic for an entire article.

Having said that, I want to affirm that my company’s management believes firmly Brazil is a great market and is heavily committed to our future in Brazil. We have just finished a major expansion, which doubled our manufacturing capacity, and purchased additional land adjacent to our property for future expansion.

**Gary Pokrassa, CPA ** //Ronkonkoma, N.Y. // **Until today nothing was ever thought of sacrificing to our country's wrongs. For six months we had worked to capture, but our cause being almost lost, something decisive and great must be done. But its failure was owing to others, who did not strike for their country with a heart. I struck boldly, and not as the papers say. I walked with a firm step through a thousand of his friends, was stopped, but pushed on. A colonel was at his side. I shouted Sic semper before I fired. In jumping broke my leg. I passed all his pickets, rode sixty miles that night with the bone of my leg tearing the flesh at every jump. I can never repent it, though we hated to kill. Our country owed all her troubles to him, and God simply made me the instrument of his punishment. The country is not what it was. This forced Union is not what I have loved. I care not what becomes of me. I have no desire to outlive my country. The night before the deed I wrote a long article and left it for one of the editors of the National Intelligencer, in which I fully set forth our reasons for our proceedings. He or the gov'r-** **After being hunted like a dog through swamps, woods, and last night being chased by gunboats till I was forced to return wet, cold, and starving, with every man's hand against me, I am here in despair. And why? For doing what Brutus was honored for. What made Tell a hero? And yet I, for striking down a greater tyrant than they ever knew, am looked upon as a common cutthroat. My action was purer than either of theirs. One hoped to be great himself. The other had not only his country's but his own, wrongs to avenge. I hoped for no gain. I knew no private wrong. I struck for my country and that alone. A country that groaned beneath this tyranny, and prayed for this end, and yet now behold the cold hands they extend to me. God cannot pardon me if I have done wrong. Yet I cannot see my wrong, except in serving a degenerate people. The little, the very little, I left behind to clear my name, the Government will not allow to be printed. So ends all. For my country I have given up all that makes life sweet and holy, brought misery upon my family, and am sure there is no pardon in the Heaven for me, since man condemns me so. I have only heard of what has been done (except what I did myself), and it fills me with horror. God, try and forgive me, and bless my mother. Tonight I will once more try the river with the intent to cross. Though I have a greater desire and almost a mind to return to Washington, and in a measure clear my name - which I feel I can do. I do not repent the blow I struck. I may before my God, but not to man. I think I have done well. Though I am abandoned, with the curse of Cain upon me, when, if the world knew my heart, that one blow would have made me great, though I did desire no greatness. Tonight I try to escape these bloodhounds once more. Who, who can read his fate? God's will be done. I have too great a soul to die like a criminal. Oh, may He, may He spare me that, and let me die bravely. I bless the entire world. Have never hated or wronged anyone. This last was not a wrong, unless God deems it so, and it's with Him to damn or bless me. As for this brave boy with me, who often prays (yes, before and since) with a true and sincere heart - was it crime in him? If so, why can he pray the same?** **I do not wish to shed a drop of blood, but 'I must fight the course.' 'Tis all that's left to me.**