Brazilian Derivatives and Securities

Marcos Carreira is responsible for Traded Risk at HSBC Brazil. Previously he was first the Derivative Products Officer and later the Technical Modeling Officer at BM&FBovespa, with contributions on risk management, derivatives pricing, exchange fees, microstructure and HFT. At Credit Suisse Brazil, he was a Managing Director in charge of the FX and IR Options desk, after being the Risk Manager responsible for Market, Counterparty and Liquidity Risks. He started his career in Finance/Product Control at Banco de Investimentos Garantia. Mr Carreira holds an engineering degree from Instituto Tecnológico de Aeronáutica (ITA), is part of the 2016 class of the Professional Masters in Economics at Insper. He has more than 20 years of experience in the Brazilian Capital Markets. Marcos lectures for the MECAI Professional Masters course in Mathematical Finance at ICMC-USP.Richard Brostowicz is an Executive Director and Head of Brazil Quants at Banco Morgan Stanley, Brazil. He has 8 yearsof experience as a quant in global markets, having worked previously at Credit Suisse, and 11 years in the Brazilian market. He studied at the University of Sao Paulo (USP) and is a lecturer for a MECAI Professional Masters course in Mathematical Finance at ICMC-USP.

• 1 Financial archeology1.1 Interest Rates and Inflation1.2 Foreign Exchange2 We mean business2.1 Calendars2.2 Interest Rate Fixings2.3 Inflation Fixings2.4 Foreign Exchange Fixings2.5 The 3 Ts in FX option pricing: A more precise version of the Black Formula3 Interesting BRL Interest Rates 3.1 3 months in the life of an IR Swap3.2 3 months in the life of a DI Future3.3 Explaining it all3.4 A simple swap3.5 A promising future The DI1 Future3.6 My first numeraire A more mathematical framework for DI Futures (DI1)3.7 The still promising Future -> The Selic Futures (OC1)3.8 Pricing BRL interest rate futures3.9 Giving 110%3.10 The CDI+ spread is a multiplicative spread3.11 How to price the 3 possible BRL Fixed X Float payoffs?4 BRL Interest Rate Market and Credit Risk4.1 Historical Spreads4.2 The term structure of volatility4.3 Potential Exposures4.4 Zero curve: and the winner is4.5 Smooth Operator4.6 Sensitivities4.7 A framework for risk4.8 Trading forwards4.9 Risk and P&L attribution5 A man with two clocks ... Foreign Exchange in Brazil5.1 FX Spot5.2 DOL5.3 Forward points strategies5.4 FX Future Crosses6 And the even more interesting USD onshore interest rates6.1 3 months in the life of a FX Swap6.2 3 months in the life of a DDI Future6.3 Explaining it all6.4 The DDI Futures (DDI) -> Why they were designed this way?<6.5 The mathematical derivation of a DDI contract price6.6 It takes two (DDI contracts) to (con)tango -> The FRA de CUPOM strategy (FRC)6.7 Calibration of the cupom curve6.8 How to compute cupom interest rate risk?6.9 Interpolation choices for the cupom curve6.10 The SCC contract6.11 The mathematical derivation and pricing of a SCC contract price6.12 The SCS contract A modern, but exotic, cousin 6.13 The mathematical derivation of a SCS contract price6.14 SCS Future pricing6.15 Forward starting SCS contracts6.16 A much simpler alternative to FRC contracts6.17 A BRL Float or Fixed X USD onshore Fixed swap7 Too many options ?7.1 IDI Options7.2 DI Future Options7.3 IR Option Strategies VTF and VID7.4 Jabuticabas: Risk Management of Options on Interest Rates7.5 Listed FX Options7.6 BRL/USD Listed FX options with daily margining7.7 BRL/USD FX Options: Strategies7.8 OTC IR and FX options8 The Mountain goes to ... Foreign Exchange Contracts offshore8.1 CME BRL/USD FX Futures8.2 OTC NDFs8.3 OTC BRL/USD Options9 Start from where ? Constructing markets for FX Forwards, Futures, Onshore USD Interest Rates and Offshore instruments9.1 Observability of contracts9.2 Structures9.3 Curve construction9.4 The offshore x onshore spread9.5 The mythical offshore BRL discounting curve10 Offshore IR Products based on CDI fixings10.1 Offshore BRL Fixed-Float swaps<10.2 Offshore BRL Fixed-Float swaptions11 The Dual case US Libor onshore swaps11.1 Payoff of US Libor onshore swaps11.2 Pricing of US Libor onshore swaps12 FX trading (Interest Rate and Fixing) Market and Credit Risk12.1 Fixing12.2 The term structure of the Cupom Cambial12.3 Potential Exposures12.4 Interpolation and sensitivities12.5 A framework for risk12.6 Trading forwards12.7 Risk and P&L attribution12.8 DOL convexity correction to a FX forward price13 A skewed perspective of the world: FX Options13.1 Starting from the end13.2 Back to the beginning13.3 Risk Management13.4 Risk and P&L Attribution14 Some cash is better than nothing what you need to know about cash products14.1 Local Government Bonds14.2 Local Corporate Bonds14.3 Local funding practices14.4 Offshore Government and Corporate Bonds14.5 Liquidity (or lack of)15 Index of choice ... Inflation-Linked Products and Curves15.1 Government Inflation-Linked Bonds15.2 Inflation-Linked Swaps15.3 Exchange traded inflation-linked Futures16 Microstructure of the listed derivatives16.1 Microstructure: Concepts16.2 Can durations be estimated?16.3 What happens in practice?16.4 What is the importance of the tick size?16.5 The model with uncertainty zones (Robert and Rosenbaum)16.6 DOL16.7 DI17 Unlucky end: On the obsolescence of products and books

The book brings to the widely traded Brazilian derivatives an intelligent analysis, that includes the latest developments in pricing - such as the choice of collateral and numeraire currency - as well as a variety of operational considerations. A 'must-read' for a number of actors.' -Helyette Geman, Professor of Mathematical Finance, Birkbeck, University of London & Johns Hopkins University "It is interesting to witness publication of a volume on Brazilian derivatives and securities more generally. The book is interesting not only for the emphasis on Brazilian markets. Discussion of often overlooked details on valuation and on curves makes it an interesting read for a potential broad audience. It is written in an engaging style while reporting relevant information and analysis, thanks also to the passionate approach of the authors.' -Professor Damiano Brigo, Chair in Mathematical Finance and Stochastic Analysis, Imperial College London 'This interesting and innovative book contains everything you need to know about doing quantitative finance in Brazil, where markets, products and rates behave very differently. It expertly tackles modeling problems unheard of in developed markets, and will be useful to anyone building financial models in non-G7 markets.' -Emanuel Derman, Author of My Life as a Quant and Models.Behaving.Badly 'This book describes the Brazilian market since its inception, presenting the main actors and forces that transformed the Brazil of Pres. Juscelino Kubitschek in 1960 to a market economy with some of the most liquid contracts in the world. The book motivates carefully the rationale behind the major exchange-traded derivatives and their operational aspects; it also covers extensively over-the-counter derivatives. It is the first book of its kind, giving the reader a complete perspective of Brazil's formidable derivatives markets. This is a 'must-read' for asset-managers, corporate treasurers, traders, investors and academics that are interested gaining knowledge on Brazilian derivatives markets.' -Marco Avellaneda, PhD, Professor of Mathematics, Courant Institute NYU; Managing Partner, Finance Concepts