I am reading about the Brazilian real devaluation crisis in 2013 around the QE3 taper announcement.

As far as I understand, capital flows went back from emerging economies like Brazil to developed economies, as a result currencies from emerging economies like the Brazilian real weakened against the dollar.

In order to counteract the real devaluation Brazil's central bank issued USD indexed domestic debt.

  1. how does this indexing work? - does this mean that if a bank buys a bond with par value of 1000 BRL with and exchange rate of 1:10 (USD/BRL) for example, so that the principal in USD would be 100, if at the time of maturity the exchange rate is say, 1:15, the bank will receive 1500 BRL which would be equal to 100 USD?

I also read that the effect of issuing this indexed bonds is that it lowers the USD futures in comparison to the spot price.

  1. How do the indexed bonds achieve this effect on the USD futures?

If I am not mistaken the USD futures are reduced because as the BRL is devalued the interest rate of the indexed bonds grows in proportion, and since the price of the future depends on the ratio between the interests on the base currency (BRL) and the interests on the term currency (USD) as the interest of the base currency grow the spot price ratio to future price also grow resulting in a positive carry.

This encourages local and foreign banks to get loans in USD exchange them for BRL and hence offsetting the BRL devaluation. Meaning that instead of the central bank engaging in currency swaps private banks do.

If this is correct the banks would benefit of the cupom cambial which is the interest rate on the bond minus the difference between the exchange rate at the time of the bond issuance and the exchange rate at the time of maturity (rate of devaluation)

But since the bonds are USD indexed, the rate of devaluation would be neutralized by the increase in the interest rate and the coupon cambial would be exactly the same as the interest rate of the bond at the time of issuance.

Am I understanding this correctly?

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    $\begingroup$ When you say "USD futures" do you mean USDBRL futures traded on the CME or are these futures traded in Brazil and what are they exactly? $\endgroup$
    – nbbo2
    Commented Nov 11, 2020 at 9:39
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    $\begingroup$ This would be "onshore us dollar futures" so inside Brazil, according to this link "Imagine that the BCB sells currency swaps, akin to selling US dollar futures. The immediate effect is a reduction of the US dollar futures price, but not of the spot dollar price. This decrease in the difference between futures and spot dollar prices – the forward premium – means that it becomes cheaper to hedge against the real’s depreciation." $\endgroup$ Commented Nov 11, 2020 at 14:50
  • $\begingroup$ In the link above it is said that currency swaps would bring the price of USD futures down in comparison to the spot price, but I read somewhere else that what the BCB does is actually sell USD indexed domestic debt. $\endgroup$ Commented Nov 11, 2020 at 14:56
  • $\begingroup$ From this link: "The way the Brazilian derivatives market works is different than what is implied in mainstream commentary. Without getting too far into those weeds, the Brazilian monetary authorities realized, from past experience with currency depreciation-type emergencies, that they did not necessarily need to offer dollars. Instead, the Brazilian treasury sells, continuously, domestic public debt indexed to US dollar rates" $\endgroup$ Commented Nov 11, 2020 at 15:00
  • $\begingroup$ From the same link above: "In other words, since the central bank “swap” reduces the futures price of dollars in relative comparison to the spot price, there is a greater incentive for banks (both Brazilian and foreign) to borrow US dollars on foreign markets and import them to take advantage of the cupom cambial spread." $\endgroup$ Commented Nov 11, 2020 at 15:00

2 Answers 2


I'm not sure if I understand the question, but I'll comment on one aspect of it.

Brazil issued dollar-denominated treasury bonds (NTN series D) between 1997 and 2000, which were pretty similar to other countries' local-law USD-denominated bonds. The notional was in USD and the coupon was fixed. Investors paid local currency to get USD notional using the spot FX rate. The document had a lot of complicated language about "nominal value update", which simply that when the time came to pay coupons and principal to bond holders, the issuer observed the spot FX rate, and paid the corresponding BRL amount to bond holders.

  • $\begingroup$ I think what you are taking about may be similar to what happened in 2013. If I understand correctly, investors would pay in BRL for this bonds but the notional was always USD denominated so at the time of maturity the investors would receive in BRL the amount corresponding the the notional in USD, this way the investor is protected against BRL devaluation. $\endgroup$ Commented Nov 11, 2020 at 15:19
  • $\begingroup$ If this is true, even if the interest rate is fixed in USD it would fluctuate in BRL. For example: if an investor buys a bond with 100 USD nominal value at a exchange rate of 1:10 so the nominal at the time is 1000 BRL, and it has an interest rate of 10%. This means that the investor buys the bond for 900 BRL equivalent to 90 USD. but let says that at the time of maturity the exchange rate is 1:15 then the investor will get 1500 BRL back corresponding to 100 USD, but since the investor paid 900 BRL it gets 40% interest rate in BRL and 10% in USD $\endgroup$ Commented Nov 11, 2020 at 15:35
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    $\begingroup$ That's how the NTN-D's from 2000 and earlier worked - very simple, just some obfuscated language. But I can't seem to find local-law dollar bonds issued in 2013. $\endgroup$ Commented Nov 11, 2020 at 15:40
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    $\begingroup$ This article describes a very vanilla USD eurobond (external-law). Brazil and many other governments and corporations isse such bonds all the time. No BRL involved. $\endgroup$ Commented Nov 11, 2020 at 17:45
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    $\begingroup$ Thanks. It's pretty common for central banks to intervene in FX markets if they don't like the exchange rate of their local currency. Usually they just trade spot FX. Brazil is unusual in that they have very liquid exchange-traded futures (FX, DI, DDI..) that the central bank trades to intervene both in FX rates (spot and forward) and BRL interest rates. I actually don't see what they don't already do that they would be able to do with swaps. $\endgroup$ Commented Nov 11, 2020 at 22:41

The difference between indexing something to a USDBRL parity and having USD on hand is best exemplified by 2002; with the elections approaching, foreign debt issued by Brazilian corporates was not rolled, and demand for "real" USD was much higher than for USD-linked instruments; so at the end of July-2002, the spot was trading much higher than the DOL future (with the typical interest rate differential the opposite happens).

And of course the Central Bank controls the market and the methodology used to calculate the PTAX (the fixing used in the indexing).

The SCCs were created in order to provide FX hedges that could be more easily traded and hedged by the banks (their Future-like characteristics enables netting within the Derivatives Exchange), and are a more flexible instrument than NTNDs.


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