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On Jorion's 'Value at Risk' chapter about risk mapping, interest rate swaps are decomposed in a portfolio of forward contracts so they can be mapped into risk factors. I'm trying to implement this for some commodity swaps which P&L depend on three risk factors: the commodity forward price, the BRL risk free rate, and the Brazilian official inflation index (IPCA).

Is there any reference on how IPCA is modelled into risk factors? I can't find anything, even in Portuguese, and have never seen this implemented.

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    $\begingroup$ For others looking for references on this, here's the best discussion I could find on risk modelling for Brazilian assets: support.everysk.com/hc/en-us/articles/… Most books about this subject focus on pricing and yield curves, while this page discusses sensitivities and cash flow mapping. $\endgroup$
    – SuavestArt
    Jan 12, 2023 at 22:26

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Brazil markets have some conventions different from other countries. Some things look very different at the first sight, but are somewhat similar to other countries. A good book is cited in Trying to understand brazil derivatives market

Brazil's equivalent of the nominal swap curve is built from the exchange-traded DI (Interbabk Deposit) futures.

Brazil treasury issues fixed-coupon bonds called NTN-F (Notas do Tesouro Nacional - Série F). Some people treat their yield curve as market factors. Others prefer to treat the spreads between the DI curve and the NTN-F as market factors, so if you're long an NTN-F bond, you can attribute your mark to market changes to the swap curve and to the treasury-swap spread.

IPCA is Índice Nacional de Preços ao Consumidor Amplo - the Extended National Consumer Price Index, very similar to the CPI in the US and other countries. It is published monthly, but, like in some other countries with a history of high inflation, they also publish a daily estimate.

Brazil treasury issues inflation-linked fixed-coupon bonds called NTN-B's. They are mostly similar to TIPS in the US. A cash flow is some fixed number times the (daily) index at the time of the cash flow divided by the index at the inception of the bond.

Everyone I know just uses the yields of the NTN-B bonds as the market factors. But you could instead try to use the spreads between the nominal curve and the inflation-adjusted curve as some kind of inflation curve.

Brazil conventions for quoting bond prices (PU) are unusual, but don't worry about them, just use yields.

Brazil has other inflation indices and used to issue bonds linked to another index, but you're unlikely to encounter that.

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Brazilian Derivatives and Securities: Pricing and Risk Management of FX and Interest-Rate Portfolios for Local and Global Markets: 2016, Marcos Carreira

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