Market Focus Use of Derivatives in Brazil August 2002

2 Risk is mostly inherent in business itself. A company that keeps its assets linked to local currency and its liabilities exposed to a devaluation of the Brazilian Real becomes vulnerable to uncertainties of future scenarios. Consequently, it is fundamentally exposed to risk. Risk is mostly inherent in business itself. A company that keeps its assets linked to local currency and its liabilities exposed to a devaluation of the Brazilian Real becomes vulnerable to uncertainties of future scenarios. Consequently, it is fundamentally exposed to risk. Use of Derivatives in Brazil Why use derivatives?

3 Use of Derivatives in Brazil The higher the volatiliy, the higher the risk

4 What is your scenario ? How much are you willing to pay ? How much are you willing to lose ? What is your scenario ? How much are you willing to pay ? How much are you willing to lose ? Use of Derivatives in Brazil Building up a scenario

5 Use of Derivatives in Brazil Facing up risks: what should you do? (a) Ignore them (b) Seek protection at established markets at over-the-counter marlets (OTC)

6  Derivatives traded at OTC markets offer not only great flexibility but also (bilateral) credit risk.  Dully regulated OTC markets will succeed in developing themselves, thus becoming liquid and cost effective.  The accuracy of legal and operational aspects of the transactions supports dully regulated OTC markets. Use of Derivatives in Brazil

7 History 1917 São Paulo Commodities Exchange - BMSP founded. The first one to deal term transactions 1991 BM&F and BMSP get merged giving birth to Brazilian Mercantile & Futures Exchange, known also as BM&F 1986 Mercantile and Futures Exchange - BM&F starts operating Future Contracts Custody and Financial Settlement of Securities - CETIP founded 1992 International Hedging Operations (Resolution 2012) 1994 Swap Operation (Resolution 2042)

8 Use of Derivatives in Brazil History – R$ billions

9 Use of Derivatives in Brazil Floating Foreign Exchange System underlined to companies the complexities involved when establishing a hedging program underlined tax treatment as a critical consideration when choosing hedging instruments brought new hedging structures previously unavailable 1999 Real Devaluation

10 New Financial Tools Use of Derivatives in Brazil “Zero Cost Collar” Combine traditional instruments to provide customized hedging alternatives. “Asiatics” Pay-out on Swaps and Options referred on the average of foreign exchange rates practiced in a specific time period. NDF OTC non deliverable forwards (CETIP 2001). Credit Derivatives Recently allowed by the Brazilian Central Bank.

11  Broadening of the clients portfolio  Standardization of documents  Transparency upon registering operations Use of Derivatives in Brazil Main Challenges

12 How to face them? Use of Derivatives in Brazil Financial Institutions Supervising Comissions (BC, CVM, SRF) Market Organizations