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Market Focus Use of Derivatives in Brazil

Market Focus Use of Derivatives in Brazil. August 2002. Use of Derivatives in Brazil. Why use derivatives?. Risk is mostly inherent in business itself.

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Market Focus Use of Derivatives in Brazil

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  1. Market Focus Use of Derivatives in Brazil August 2002

  2. Use of Derivatives in Brazil Why use derivatives? 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.

  3. Use of Derivatives in Brazil The higher the volatiliy , the higher the risk

  4. Use of Derivatives in Brazil Building up a scenario What is your scenario ? How much are you willing to pay ? How much are you willing to lose ?

  5. Use of Derivatives in Brazil Facing up risks: what should you do? Ignore them (a) Seek protection (b) at established markets at over-the-counter marlets (OTC)

  6. Use of Derivatives in Brazil • 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.

  7. Use of Derivatives in Brazil History BM&F and BMSP get merged giving birth to Brazilian Mercantile & Futures Exchange, known also as BM&F São Paulo Commodities Exchange - BMSP founded. The first one to deal term transactions Swap Operation (Resolution 2042) 1992 1986 1917 1991 1994 Mercantile and Futures Exchange - BM&F starts operating Future Contracts Custody and Financial Settlement of Securities - CETIP founded International Hedging Operations (Resolution 2012)

  8. Use of Derivatives in Brazil History – R$ billions

  9. 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 Use of Derivatives in Brazil Real Devaluation Floating Foreign Exchange System

  10. “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. Use of Derivatives in Brazil New Financial Tools

  11. Use of Derivatives in Brazil Main Challenges • Broadening of the clients portfolio • Standardization of documents • Transparency upon registering operations

  12. Use of Derivatives in Brazil How to face them? Financial Institutions Supervising Comissions (BC, CVM , SRF) Market Organizations

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