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Latin American derivatives: Central banks save the day

Mexico and Brazil come to terms with meaning of exotic

Suitability debate

Banks won’t be fooled again

The first signs of calm as corporates in Mexico and Brazil faced derivatives meltdown came as the respective central banks activated billions of dollars to stop the free fall in October.

The Brazilian central bank initially stepped in and auctioned dollar lines, intervened in the spot market selling dollars to help with the repatriation of loans and sold off dollar futures to help support supply in the debt markets. Corporates had bet that the real would stay between 1.65 and 1.55 to the dollar. "At one point the real went to 2.4 and there were no sellers," says Brazil’s central bank governor, Henrique Meirelles. "That is when we announced we would sell $50 billion in the futures market. We were long dollars at the time because we had noticed there was an oversupply in the market and so, over the last few years, we started to build a dollar position. We were suspicious that players were overexposed and so we were ready, though we weren’t sure exactly which corporates or financial institutions were going to be hit hardest as so many trades were booked outside Brazil."

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