market focus use of derivatives in brazil august 2002
TRANSCRIPT
Market FocusUse of Derivatives in Brazil
August 2002
2
Risk is mostly inherent in business itself.
A company that keeps its assets linked to local currency and its liabilities exposed to a
devaluation of the Brazilian Real becomes vulnerable to uncertainties of future scenarios.
Consequently, it is fundamentally exposed to risk.
Risk is mostly inherent in business itself.
A company that keeps its assets linked to local currency and its liabilities exposed to a
devaluation of the Brazilian Real becomes vulnerable to uncertainties of future scenarios.
Consequently, it is fundamentally exposed to risk.
Use of Derivatives in Brazil
Why use derivatives?
3
Use of Derivatives in Brazil
The higher the volatiliy , the higher the risk
CDI
13,0%
18,0%
23,0%
28,0%
33,0%
38,0%
43,0%
48,0%
jan/98 jul/98 jan/99 jul/99 jan/00 jul/00 jan/01 jul/01 jan/02 jul/02
PTAXR$/US$
1,0
1,5
2,0
2,5
3,0
3,5
jan/98 jul/98 jan/99 jul/99 jan/00 jul/00 jan/01 jul/01 jan/02 jul/02
4
What is your scenario ?
How much are you willing to pay ?
How much are you willing to lose ?
What is your scenario ?
How much are you willing to pay ?
How much are you willing to lose ?
Use of Derivatives in Brazil
Building up a scenario
5
Use of Derivatives in Brazil
Facing up risks: what should you do?
(a)(a) Ignore them
(b)(b) Seek protectionat established markets
at over-the-counter marlets (OTC)
6
Derivatives traded at OTC markets offer not only great flexibility but also (bilateral) credit risk.
Dully regulated OTC markets will succeed in developing themselves, thus becoming liquid and
cost effective.
The accuracy of legal and operational aspects of the transactions supports dully regulated OTC
markets.
Use of Derivatives in Brazil
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Use of Derivatives in Brazil
History
1917
São Paulo Commodities Exchange - BMSP founded.
The first one to deal term transactions
1991
BM&F and BMSP get merged giving birth to Brazilian Mercantile & Futures Exchange,
known also as BM&F
1986
Mercantile and Futures Exchange - BM&F starts
operating Future ContractsCustody and Financial
Settlement of Securities - CETIP founded
1992
International Hedging Operations
(Resolution 2012)
1994
Swap Operation(Resolution 2042)
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Use of Derivatives in Brazil
History – R$ billions
DI x US$ Com
0
50
100
150
200
250
1997 1998 1999 2000 2001
CETIP BM&F
Others
0
50
100
150
200
250
1997 1998 1999 2000 2001
CETIP BM&F
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Use of Derivatives in Brazil
Flo
ati
ng
Fo
reig
n E
xc
ha
ng
e S
ys
tem
underlined to companies the complexities involved
when establishing a hedging program
underlined tax treatment as a critical consideration
when choosing hedging instruments
brought new hedging structures previously
unavailable
1999
1,00
1,50
2,00
2,50
3,00
3,50
jan/98 mai/98 set/98 jan/99 mai/99 set/99 jan/00 mai/00 set/00 jan/01 mai/01 set/01 jan/02 mai/02
Fonte: Banco Central
R$/US$
Real Devaluation
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New Financial Tools
Use of Derivatives in Brazil
“Zero Cost Collar” Combine traditional instruments to provide customized hedging alternatives.
“Asiatics”Pay-out on Swaps and Options referred on the average of foreign exchange rates practiced in a specific time period.
NDF OTC non deliverable forwards (CETIP 2001).
Credit Derivatives Recently allowed by the Brazilian Central Bank.
11
Broadening of the clients portfolio
Standardization of documents
Transparency upon registering operations
Use of Derivatives in Brazil
Main Challenges
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How to face them?
Use of Derivatives in Brazil
Financial Institutions
Supervising Comissions(BC, CVM , SRF)
Market Organizations
