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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?

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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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  • $\begingroup$ Thanks Dimitri, will be reviewing these $\endgroup$
    – F0l0w
    Nov 11, 2020 at 13:21
  • $\begingroup$ Would you know any good reading for latam markets in general? perhaps mexico, colombia and chile $\endgroup$
    – F0l0w
    Nov 12, 2020 at 2:21
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    $\begingroup$ You'll have trouble finding it, but Citi Em strategy - Milena Todorova, Mitra Ghamsari - Local Market Instruments in Latin America (2006) was pretty good, but is a little dated now. BBVA bbvaresearch.com/wp-content/uploads/mult/… and CFA cfainstitute.org/-/media/documents/article/rf-brief/… are good. Colombia and Chile have some local weirdnesses, but I don't know any good write-ups, sorry. $\endgroup$
    – Dimitri Vulis
    Nov 12, 2020 at 2:44

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