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The Brazilian financial markets operate in a very different way to G7 markets. Key differences include onshore and offshore markets, exponential rates, business days day-counts, and price formation from the futures markets (instead of the cash markets).
This book provides a quantitative, applied guide to the offshore and onshore Brazilian markets, with a focus on the financial instruments unique to the region. It offers a comprehensive introduction to the key financial 'archaeology' in the Brazil context, exploring interest rates, FX and inflation and key differences from G7 market finance. It explores the core industry investment banking business in detail, from FX to interest rates and cash and inflation. Finally it introduces the region's unique financial instruments, as well as their pricing and risk management needs.
Covering both introductory and complex topics, this book provides existing practitioners in Brazil, as well as those interested in becoming involved in these markets, everything they need to understand the market dynamics, risks, pricing and calibration of curves for all products currently available.
Marcos Carreira is a highly experienced quantitative finance practitioner. He has spent the last four years as Technical Modeling Officer for BM&FBovespa, where he was responsible Product Development and Quantitative Research. Before this, he held positions as Derivative Products Officer at BVMF, Managing Director - Trader at Credit Suisse, and Structured Products and Financial/Product Control at Banco de Investimentos Garantia.
Marcos is a frequent speaker at conferences such as ICBI Global Derivatives Trading and Risk Management (USA and Europe) and regularly presents on quantitataive finance topics at business schools. He studies electrical engineering at Instituto Technologico de Aeronautica (ITA).
Richard Brostowicz is an Executive Director and Head of Brazil Quants at Banco Morgan Stanley, Brazil. He has 8 years of experience as a quant in global markets, having worked previously at Credit Suisse, and 11 years in the Brazilian market. He studies at the University of Sao Paolo.
Table of Contents
1 Financial archeology<BR>1.1 Interest Rates and Inflation<BR>1.2 Foreign Exchange<BR>2 We mean business<BR>2.1 Calendars<BR>2.2 Interest Rate Fixings<BR>2.3 Inflation Fixings<BR>2.4 Foreign Exchange Fixings<BR>2.5 The 3 Ts in FX option pricing: A more precise version of the Black Formula<BR>3 Interesting BRL Interest Rates <BR>3.1 3 months in the life of an IR Swap<BR>3.2 3 months in the life of a DI Future<BR>3.3 Explaining it all<BR>3.4 A simple swap<BR>3.5 A promising future - The DI1 Future<BR>3.6 My first numeraire - A more mathematical framework for DI Futures (DI1)<BR>3.7 The still promising Future -> The Selic Futures (OC1)<BR>3.8 Pricing BRL interest rate futures<BR>3.9 Giving 110%<BR>3.10 The CDI+ spread is a multiplicative spread<BR>3.11 How to price the 3 possible BRL Fixed X Float payoffs?<BR>4 BRL Interest Rate Market and Credit Risk<BR>4.1 Historical Spreads<BR>4.2 The term structure of volatility<BR>4.3 Potential Exposures<BR>4.4 Zero curve: and the winner is<BR>4.5 Smooth Operator<BR>4.6 Sensitivities<BR>4.7 A framework for risk<BR>4.8 Trading forwards<BR>4.9 Risk and P&L attribution<BR>5 A man with two clocks ... Foreign Exchange in Brazil<BR>5.1 FX Spot<BR>5.2 DOL<BR>5.3 Forward points strategies<BR>5.4 FX Future Crosses<BR>6 And the even more interesting USD onshore interest rates<BR>6.1 3 months in the life of a FX Swap<BR>6.2 3 months in the life of a DDI Future<BR>6.3 Explaining it all<BR>6.4 The DDI Futures (DDI) -> Why they were designed this way?<BR>6.5 The mathematical derivation of a DDI contract price<BR>6.6 It takes two (DDI contracts) to (con)tango -> The FRA de CUPOM strategy (FRC)<BR>6.7 Calibration of the cupom curve<BR>6.8 How to compute cupom interest rate risk?<BR>6.9 Interpolation choices for the cupom curve<BR>6.10 The SCC contract<BR>6.11 The mathematical derivation and pricing of a SCC contract price<BR>6.12 The SCS contract - A modern, but exotic, cousin <BR>6.13 The mathematical derivation of a SCS contract price<BR>6.14 SCS Future pricing<BR>6.15 Forward starting SCS contracts<BR>6.16 A much simpler alternative to FRC contracts<BR>6.17 A BRL Float or Fixed X USD onshore Fixed swap<BR>7 Too many options ?<BR>7.1 IDI Options<BR>7.2 DI Future Options<BR>7.3 IR Option Strategies - VTF and VID<BR>7.4 Jabuticabas: Risk Management of Options on Interest Rates<BR>7.5 Listed FX Options<BR>7.6 BRL/USD Listed FX options with daily margining<BR>7.7 BRL/USD FX Options: Strategies<BR>7.8 OTC IR and FX options<BR>8 The Mountain goes to ... Foreign Exchange Contracts offshore<BR>8.1 CME BRL/USD FX Futures<BR>8.2 OTC - NDFs<BR>8.3 OTC - BRL/USD Options<BR>9 Start from where ? Constructing markets for FX Forwards, Futures, Onshore USD Interest Rates and Offshore instruments<BR>9.1 Observability of contracts<BR>9.2 Structures<BR>9.3 Curve construction<BR>9.4 The offshore x onshore spread<BR>9.5 The mythical offshore BRL discounting curve<BR>10 Offshore IR Products based on CDI fixings<BR>10.1 Offshore BRL Fixed-Float swaps<BR>10.2 Offshore BRL Fixed-Float swaptions<BR>11 The Dual case - US Libor onshore swaps<BR>11.1 Payoff of US Libor onshore swaps<BR>11.2 Pricing of US Libor onshore swaps<BR>12 FX trading (Interest Rate and Fixing) Market and Credit Risk<BR>12.1 Fixing<BR>12.2 The term structure of the Cupom Cambial<BR>12.3 Potential Exposures<BR>12.4 Interpolation and sensitivities<BR>12.5 A framework for risk<BR>12.6 Trading forwards<BR>12.7 Risk and P&L attribution<BR>12.8 DOL convexity correction to a FX forward price<BR>13 A skewed perspective of the world: FX Options<BR>13.1 Starting from the end<BR>13.2 Back to the beginning<BR>13.3 Risk Management<BR>13.4 Risk and P&L Attribution<BR>14 Some cash is better than nothing - what you need to know about cash products<BR>14.1 Local Government Bonds<BR>14.2 Local Corporate Bonds<BR>14.3 Local funding practices<BR>14.4 Offshore Government and Corporate Bonds<BR>14.5 Liquidity (or lack of)<BR>15 Index of choice ... Inflation-Linked Products and Curves<BR>15.1 Government Inflation-Linked Bonds<BR>15.2 Inflation-Linked Swaps<BR>15.3 Exchange traded inflation-linked Futures<BR>16 Microstructure of the listed derivatives<BR>16.1 Microstructure: Concepts<BR>16.2 Can durations be estimated?<BR>16.3 What happens in practice?<BR>16.4 What is the importance of the tick size?<BR>16.5 The model witth uncertainty zones (Robert and Rosenbaum)<BR>16.6 DOL<BR>16.7 DI<BR>17 Unlucky end: On the obsolescence of products and books