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  • Box 1. Comparison: Derivatives Market and Key Economic Variables

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    The document discusses Brazil's derivatives markets and how they relate to the country's economy. It notes that Brazil has a history of high inflation and interest rates, concentrating its credit markets in short-term loans and instruments. Derivatives markets have helped domestic enterprises hedge risks from commodity price fluctuations, exchange rate variability, and interest rate changes. Foreign investors have also used derivatives to profit from Brazil's high interest rates compared to other economies. While large in size, derivatives markets are important for the economic functions they serve, such as hedging various risks.

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    The document discusses Brazil's derivatives markets and how they relate to the country's economy. It notes that Brazil has a history of high inflation and interest rates, concentrating its credit markets in short-term loans and instruments. Derivatives markets have helped domestic enterprises hedge risks from commodity price fluctuations, exchange rate variability, and interest rate changes. Foreign investors have also used derivatives to profit from Brazil's high interest rates compared to other economies. While large in size, derivatives markets are important for the economic functions they serve, such as hedging various risks.

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    13 views1 page

    Box 1. Comparison: Derivatives Market and Key Economic Variables

    Uploaded by

    rdixit2
    The document discusses Brazil's derivatives markets and how they relate to the country's economy. It notes that Brazil has a history of high inflation and interest rates, concentrating its credit markets in short-term loans and instruments. Derivatives markets have helped domestic enterprises hedge risks from commodity price fluctuations, exchange rate variability, and interest rate changes. Foreign investors have also used derivatives to profit from Brazil's high interest rates compared to other economies. While large in size, derivatives markets are important for the economic functions they serve, such as hedging various risks.

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    in domestic interest rates Brazils history of high inflation and high nominal interest rates has left its

    s credit markets with a concentration of short-term loans and debt instruments and the derivatives markets have served to hedge the fluctuations in these short-term interest rates. Even purely domestic enterprises face the risk of commodity price fluctuations and the indirect impact from exchange rate and interest rate variability. Also the cost of complying with environmental, climate change requirements can be hedged through futures and options on emission abatement permits (i.e. carbon trading). Lastly, some foreign investors including hedge funds have

    Box 1. Comparison: Derivatives Market and Key Economic Variables


    (some figures in US dollars and some in Reals)
    Derivatives Amounts and Trading Volumes CETIP{} (end of June 2007) Outstanding amounts: Swaps Options NDF Total BMF{2} Open Interest (July 2007) Futures & Options Trading Volume Futures & Options Memo: Total O.I. BMF + CETIP Central Bank Exposure: from swap with reset GDP figures (2006) GDP Traded Goods: Foreign Portfolio investment (first 4 months of 2007) DFI (first 4 months of 2007) 1,863 billion reals $23.3 billion 2.323 trillion reals $245 billion $9 billion $14.5 billion $18.8 billion $10 billion (80% of GDP) 209.9 billion reals 0.42 billion reals 43.4 billion reals 253.7 billion reals

    1,609 billion reals 32.34 trillion reals

    (69% of GDP) (1,392% of GDP)

    Financial Measures (April 2007) Market capitalization: 2,161 billion Reals Public debt: 1,500 billion Reals (1) CETIP defined in Appendix 2; (2) Brazilian Mercantile and Futures Exchange

    used derivatives markets for investment strategies such as capturing the large interest rate differential between Brazil and most developed economies, as we discuss in more detail below. While they are not important merely because of their size, the significance of the economic functions they perform is reflected in the fact that Brazils derivatives markets are both large and growing rapidly. Their enormous size, and their size in comparison to some other familiar economic variables, is included in Box 1. Amongst other possible comparisons, the amount of

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