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Brazilian Derivatives: Convertibility, Transferability, and Cupom Cambial

Article Quant Q&A · Author: F0l0w
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Summary

The document introduces cross-border risks relevant to Brazilian derivatives, distinguishing transferability from convertibility. Transferability risk is the possibility that local rules prevent repatriating assets held onshore, regardless of the currency in which those assets are denominated. Convertibility risk is the possibility that a country restricts exchanging its currency for another currency. The answer notes that these risks can affect the relative yields available onshore and offshore and may influence the preference for non-deliverable forwards over physically settled FX forwards.

It describes cupom cambial as the return earned on onshore US dollars in Brazil, operationally associated with exchange-traded futures settled in reais. The answer recommends specialist references on Brazilian markets, but does not provide pricing equations, contract specifications, or market data. Its explanations are introductory, and the distinctions and instruments should be checked against current local market conventions and regulations.

Key ideas

  • Transferability risk concerns restrictions on moving locally held assets across borders.
  • Convertibility risk concerns restrictions on exchanging local currency for foreign currency.
  • Cross-border risks can contribute to yield differences between onshore and offshore instruments.
  • Non-deliverable forwards avoid physical currency exchange, which can reduce exposure to convertibility restrictions.
  • Cupom cambial describes returns on onshore US dollars and is linked to Brazilian futures settled in reais.

Tags

FuturesForexFixed incomeDerivatives pricing
Full text
# Trying to understand brazil derivatives market


# Trying to understand brazil derivatives market












I am trying to get a better understanding of brazil's market, specially derivs.

I know they have certain instruments such as "Convertibility" (based on the yields spread between onshore and offshore) and few other things such as "Cupom Cambial". I have finance background but for some reason (perhaps as I am not a former local nor expert in LATAM markets) they look a bit grey area or difficult to intuitively understand.

Does anyone knows any book or reading to get a better sense of their derivative markets?

## Answer by Dimitri Vulis (score 5)

https://quant.stackexchange.com/a/59297

You're in luck. There's an excellent book about Brazil markets Marcos C. S. Carreira, Richard J. Brostowicz. Brazilian Derivatives and Securities: Pricing and Risk Management of FX and Interest-Rate Portfolios for Local and Global Markets. Palgrave Macmillan 2016.

Also if you can find Credit Suisse Guide to Brazil Local Markets (2014), it may help.

To answer your question about convertibility and transferability (note that some firms call them both convertibility, which is why you should understand the difference). They're both part of cross-border risk.

Transferability is the risk that the country will stop you from taking home onshore assets. It doesn't matter what currency they're denominated in. For example, if you have USD or EUR assets onshore in Brazil or South Korea etc, subject to local law, then there is a danger that the country will decide to stop you from repatriating these assets. They're still yours, you just aren't allowed to move them home.

Convertibility is the risk that the country will prohibit converting their currency into other currencies. This risk is one of the reasons why market participants prefer non-delivery forwards (which have no convertibility risk) to physical delivery FX forwards that involve emerging market currencies.

Hence, you're going to have different yields (to compensate for different risks), for example on US dollars in Brazil (subject to transferability risk) than on US dollars offshore. "Cupom cambial" is what you earn on USD onshore in Brazil (operationally, earning that involves some Brazil exchange traded futures settled in reais).

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.