Brazilian Derivatives and Securities: Pricing and Risk by Marcos C. S. Carreira

By Marcos C. S. Carreira

The Brazilian monetary markets function in a really assorted option to G7 markets. Key changes comprise onshore and offshore markets, exponential charges, company days day-counts, and cost formation from the futures markets (instead of the money markets).

This e-book presents a quantitative, utilized consultant to the offshore and onshore Brazilian markets, with a spotlight at the monetary tools designated to the sector. It bargains a complete advent to the major monetary 'archaeology' within the Brazil context, exploring rates of interest, FX and inflation and key alterations from G7 industry finance. It explores the center funding banking enterprise intimately, from FX to rates of interest and funds and inflation. eventually it introduces the region's detailed monetary tools, in addition to their pricing and threat administration needs.

Covering either introductory and intricate themes, this booklet offers current practitioners in Brazil, in addition to these attracted to changing into enthusiastic about those markets, every little thing they should comprehend the marketplace dynamics, hazards, pricing and calibration of curves for all items at present available.

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Additional info for Brazilian Derivatives and Securities: Pricing and Risk Management of FX and Interest-Rate Portfolios for Local and Global Markets

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So if you’re charting the effect of the intervention, you have to consider the date of the auction, the date of the fixing at the start, and the date of the fixing at the end. When rolling the existing stock, it is common to see a big difference between the date of the auction and the date of the fixing at the start. Financial Archeology 33 So yes, getting all that data is important if you want to track the BCB’s interventions in the derivatives market. The implied rate on the USD leg of the swap makes the FX risk at inception different than the FX risk at maturity, and clearly the values in BRL at inception will certainly be different than those at maturity.

Too many times emerging markets have started an intervention and the market just divided the available reserves by the size of the intervention, counted the days and said (with its money): “I call your bluff”. A country can keep the bands playing, if it has the means, but this was not the case with Brazil in 1999. Interventions in both spot and futures markets were common (although the interventions in the futures markets were not official), but the level of reserves was not as high as necessary to support the intervention’s goals for enough time.

How should the bank control for that? How to price this ongoing hedge? It is an interesting problem. Back to the customer, he is likely to suffer realized losses from time to time, and there’s also a MTM (mark-to-market) loss on the vega position of the options that are still forward starting. Financial Archeology 39 The second product is more straightforward: just a series of OTM USD calls; the customer is less likely to suffer realized losses, depending on the moneyness and maturity of the options.

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