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FOREIGN EXCHANGE

FX derivatives fight history and a currency war

Brazil’s government has not shirked from competitive devaluation policies. The most recent, in July, was a strike against currency speculators through a new FX derivative tax. Rob Dwyer looks at how it will affect corporate hedging strategies.

THE EVOLUTION OF the use of derivatives by corporations in Latin America has not been straightforward. The fallout from the spectacular misuse of FX hedging products by some Latin American corporates continues to throw up practical and psychological barriers.

In Brazil, the largest market and comparable only to Mexico in the adoption of risk management trades by corporates, the regulators have just introduced another macro-prudential measure that targets FX derivatives. Confusion still reigns about exactly what the new decree means.

What is clear, though, is that the latest Medida Provisória will be an impediment for many corporate FX hedging activities. For now, markets that need to grow in the region, such as interest rate options and onshore credit default swaps, are awaited more with hope than expectation.

Hangover from 2008

The crisis of 2008 created many losers but perhaps none quite so high profile as some of the Latin American companies that got exposed on currency derivatives. Essentially, companies such as Brazilian food processor Sadia, pulp maker Aracruz and Mexican retailer Comercial Mexicana (known as Comerci) had entered into non-deliverable forwards, target forward agreements and currency options that for many quarters were delivering revenues to the companies.

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