Why does a country like Venezuela impose capital controls?Capital controls allow a country to preserve a fixed rate of exchange for its currency without risking its holdings of hard currency or foreign currency reserves. The problem, however, is that this control or preservation comes at a substantial cost, as many investors will no longer be willing to invest the same levels of funds in that country, if at all. Capital controls allow a country, whether Venezuela, Malaysia, or China, to control the level and flow of capital flowing in and out of the country. Because few countries have a problem with too much capital flowing in, but rather with capital out flows capital flight capital controls are typically utilized to prohibit massive capital outflows following unfavorable or crises in political or economic eventsVenezuelan Bolivar: Case Questions

In the case of Venezuela, what is the difference between the gray market and the black market?The black market is the easier to define: the trading of currency through unlicensed or unrecognized organizations or institutions, which by definition in these countries is illegal. The gray market is the use of a legal process to achieve what is generally considered inconsistent with government desires or policy goals. Although by definition not illegal, gray market trading is often considered inappropriate and may be politically dangerous by the participants.Venezuelan Bolivar: Case Questions

Create a financial analysis of Santiagos choices and use it to make a recommend a solution to his problem.Venezuelan Bolivar: Case Questions

Its not clear whether Mr. Chvez understands what a massive hit Venezuelans take when savings and earnings in dollar terms are cut in half in just three years. Perhaps the political-science student believes that more devalued bolivars makes everyone richer. But one unavoidable conclusion is that he recognized the devaluation as a way to pay for his Bolivarian missions, government projects that might restore his popularity long enough to allow him to survive the recall, or survive an audacious decision to squelch it.Money Fun in the Venezuela of Hugo Chvez,The Wall Street Journal (eastern edition), February 13, 2004, p. A13.Venezuelan Bolivar