Pricing Brazilian Instruments - Bonds, Inflation and Swaps
October 27, 2014

In the past few releases FINCAD Analytics Suite has increased its coverage of instruments in the Brazilian market. The coverage now includes pricing for Brazilian government bonds, inflation bonds and swaps. This article discusses some specific instruments that FINCAD Analytics Suite covers along with examples. Please note that the coverage is not limited to these specific examples and that the functions are more general in nature and may be able to cover other variations.

In 2008, FINCAD Analytics Suite introduced the ability to price Brazilian government bonds by using a flexible bond function, aaBond3_dgen_y, which calculates yield and various statistics for a custom structured bond. The function aaBond_Index_y was also introduced to calculate yield and risk statistics from price for Brazilian inflation index linked bonds.

Brazilian Government Bonds

There are many types of Brazilian bonds in the market. Some of the common types include:

  • Brazilian BBCs/LTN
  • Brazilian LFT
  • Brazilian Dollar Linked Series NTN-D
  • Brazilian Fixed Coupon Series NTN-F

The ability to price the Brazilian government bonds is done by using a flexible bond function, aaBond3_dgen_*. (See Figure 1). This function is not specific to the Brazilian market and can be used to price multiple jurisdictions and corporate bonds. It also allows the user to control other parameters including:

  • Amortization, accreting, roller coaster deals
  • Incorporate a sinking schedule
  • Control truncating or rounding of outputs and internally calculated values

The class of functions, aaBond3_dgen_* includes pricing and cash flow functions. These functions will output multiple statistics including fair value, accrued interest and modified duration among other outputs. A utility function to help create the amortization /sinking schedules is also provided.

The attached workbook provides the user with some examples of the above listed bonds. The CUSIP / ISIN number is included on each worksheet.

Figure 1


Brazilian Inflation Bonds

Some common types of Brazilian inflation bonds include:

  • Brazilian Inflation Linked Series NTN-B
  • Brazilian Inflation Linked Series NTN-C

The pricing of inflation bonds is done using the functions aaBond_BR_index_*. (See Figure 2). As with all of our jurisdictional inflation bond functions, the family of functions includes pricing from yield, ability to output cash flows, calculate yield given price and ability to output the implied inflation rate.

Alternatively, a flexible inflation bond function also exists that allows the user to price multiple jurisdictions using a single function. This function allows the user to control certain parameters and outputs including rounding and truncating of the reference index, index ratio, interest, projected principal and real accrued interest.

The attached workbook provides the user with examples of the above listed bonds. The CUSIP / ISIN number is included on each worksheet.

Figure 2


Brazilian Swaps

FINCAD Analytics Suite also provides functionality to price Brazilian swaps. Specifically, FINCAD Analytics Suite provides the ability to price Brazilian Pre-DI (Deposito Interbancario) swaps. In these swaps, the floating rate used is the average one day interbank deposit rate (CDI).

The family of functions that can be used to price these instruments is aaSwap_BRL_*. There are pricing and cash flow functions available. The outputs of the functions include fair value, accrual value and various risk statistics (basis point value, duration and convexity).

For more information or a customized demonstration of the software, contact a FINCAD Representative.