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Derivatives: Mexico and Brazil come to terms with meaning of exotic

Corporate losses on currency derivatives have increased the pressure on banks, as well as calls for improved transparency, the enforcement of margin-call documentation, regular marking to market, exchange trading of products and the use of clearing houses. Chloe Hayward reports.

Central banks save the day

Suitability debate

Banks won’t be fooled again

EXOTIC DERIVATIVES HAVE had a bad 12 months. They have been branded the evil product behind the global recession, while the banks that created them have paid a heavy price for their use. In Mexico and Brazil some corporates used exotic currency derivatives to bolster their balance sheets. Now the regulators, bankers and corporates are sorting through the damage hoping to develop solutions that will make this a one-off problem.

"The exporters started selling multiples of their FX revenues. Why on earth would anyone do that? It’s the equivalent of saying: ‘We’re an exporter and our margins are shrinking because the real is strengthening. How about we take some of our working capital to Las Vegas to see if we can boost our margins?’"

Arminio Fraga, BM&F Bovespa

Arminio Fraga, BM&F Bovespa
"Some Brazilian companies were selling what turned out to be naked options on the real," says Arminio Fraga, chairman of the securities, commodities and futures exchange BM&F Bovespa, as well as a former central bank governor of Brazil.

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