About CME Brazilian Real Futures

Latin America’s largest economy and the world’s 10^th largest is found in Brazil, which also has the strongest and most diversified export base in the region. Structural reforms are underway to ensure that gains from monetary and political change foster economic stability and keep inflation down.

One of the most important of the these reforms was the Real Plan which Brazil intoduced as a a successful economic stabilization program in July 1994. The Real Plan and its new “real” currency (plural: reais) dramatically lowered the country’s historically high inflation rate to single digit figures by 1998.

Another aspect of the reform process, designed to encourage long-term investment, is a program to privatize state and semi-state entities. Additionally, lower tariffs opened the economy to foreign competition, keeping prices for basic goods down. With a more stable economic environment, Brazil has posted higher growth rates.

Trading in CME® Brazilian real futures and options on futures began in 1995. CME currently offers markets for trading CME Brazilian real futures and options on futures on CME Globex® as well as on its trading floor.

CME® Brazilian real futures and options on futures contracts offer financial institutions, investment managers, corporations and private investors the right tools to take advantage of, and to manage, the risks associated with the fluctuation of the real vs. the U.S. dollar. Futures contracts are quoted in U.S. dollars per real, and call for cash settlement at expiration.

The contract’s size is 100,000 Brazilian reais per contract. Trading occurs in $.00005 per Brazilian real increments, or $5.00 per contract. CME Brazilian real futures list twelve consecutive contract months at one time. Traditional CME FX products list six months at one time and futures expire on a quarterly cycle – March, June, September and December. Options on futures trade twelve consecutive contract months plus four weekly expirations.

During the cash settlement process, CME marks all open CME Brazilian real positions to the final settlement price determined in the futures pit on the last trading day. Then on the settlement day, all of those positions are cash-settled to a dollars-per-real rate. This rate is equal to the reciprocal of the "reals per commercial U.S. dollar exchange rate for cash delivery” as calculated by the Central Bank of Brazil, and represents the volume-weighted Brazilian real transaction price for 48-hour delivery of spot commercial U.S. dollars. Exercised options on futures contracts are settled by the delivery of futures contracts.

Structure of Real Rates
The foreign exchange market in Brazil currently has two rates: the official commercial rate and the official floating market rate. The CME Brazilian real contract is based on the commercial market rate, which is used for most domestic trade and financial transactions. Participation in the commercial market is restricted and all transactions are executed through authorized financial institutions. Currently the Central Bank of Brazil designates exchange rate bands and intervenes to keep the commercial rate within them. The Central Bank can and has altered these bands as it deems necessary. The floating market was established to oversee transactions relating to tourism, fixed income investments and non-regulated exchange transactions.

Unique Features
The CME Brazilian real contract differs from traditional CME FX products in three main areas: last trading day, months traded and the final settlement procedure.

• CME Brazilian real futures trading terminates on the last business day of the month preceding the contract month, and the settlement day is the business day following the last day of trading. Trading on traditional CME FX futures terminates the second business day immediately preceding the third Wednesday of the contract month. For example, September CME Brazilian real futures would expire on the last business day in August, whereas the September CME Euro FX futures contract would expire in mid-September.

• CME Brazilian real futures are cash-settled like the CME Eurodollar and S&P® contracts. Traditional CME FX products call for physical delivery at expiration.