Credit derivatives in Brazil

The amounts outstanding of credit derivatives have grown exponentially over the past years, and these financial intruments that allow market participants to trade credit risk have become very popular in Europe and in the United States. Although the Central Bank of Brazil passed regulation in 2002 allowing the trade of credit derivatives in the domestic market, almost nothing happened in this arena, and the credit derivatives market in Brazil barely exists. This thesis aims at investigating why such a market has not developed in one of the largest economies of the world. The thesis starts by explaining the mechanism of one of the most popular credit derivatives - the credit default swap (CDS). Then, since bonds and CDS are closely related, the thesis provides short descriptions of the Brazilian market for government issued bonds and corporate bonds. Subsequently we assess the Brazilian regulation for credit derivatives and start to find some reasons why the market has not been developed. We then approach a real life example of estimating the CDS premium for a local company using the no-arbitrage argument and compare the results with the premium of the offshore CDS available for the same company.