Pricing a Brazilian PRE/DI Swap

D. L. Chertok†
November 8, 2012

Summary
A Brazilian swap is an exchange-guaranteed contract between two counterparties where
at maturity both sides exchange netted payments accrued according to different sched-
ules.

1 Mathematical formulation
At inception, counterparties of a Brazilian PRE/DI swap agree to exchange payments
at maturity [1]. The ”fixed”, or PRE side, pays the contract notional amount:

N (t, T ; rP RE (t0 , T ))= N (t0 )AF (t0 , t; rP RE (t0 , T )) , (1.1)

n
AF (t0 , t; rP RE (t0 , T )) = [1 + rP RE (t0 , T )] 252 , (1.2)
N (T, T ; rP RE (t0 , T )) = Ncontract , (1.3)

where:

t - current time; t ∈ [t0 ; T ],

T - swap maturity ( in days ),
t0 - effective date,
rP RE (t0 , T ) - futures-based rate ( on the PRE side ) quoted from t0 to T ,
N (t, T ; rP RE (t0 , T )) - notional at t,
N (t0 ) - notional at inception,
AF (t0 , t; rP RE (t0 , T )) - accrual factor from t0 to t determined by the contract rate
rP RE (t0 , T ),
n - number of business days between t0 and t ( accrual days ),
Ncontract - contract notional payable at T .
† D. L. Chertok, Ph. D., CFA, (daniel chertok@hotmail.com) is a quantitative investment professional in

Chicago, IL.

1
 The ”floating”, or DI, side pays the accrued amount based on the notional amount
on effective date and the daily average overnight interest rate:
N t, T ; {rDI (ti )}K = N (t0 )AF t0 , t; {rDI (ti )}K



i=0 i=0 , (1.4)
n
1
Y
AF t0 , t; {rDI (ti )}K


i=0 = [1 + rDI (ti )] 252 , (1.5)
i=1

where:

K - number of business days between t0 and T ,

rDI (ti ) - average daily overnight rate at ti ∈ [t0 ; tK = T ] , i = 0, K.

The present value of the PRE side is the current notional accrued at the contract
PRE rate to maturity and then discounted back to the valuation date:
AF (t, T ; rP RE (t0 , T ))
P VP RE (t) = N (t, T ; rP RE (t0 , T )) . (1.6)
AF (t, T ; rP RE (t, T ))
(1.7)
The present value of the DI side is simply the current notional ( accrued at the actual
realized DI rate from effective date to today ):
P VDI (t) = N (t, T ; rDI (t0 , T )) . (1.8)
The current present value of the swap is the difference between the two sides:
P Vswap (t) = (P VDI (t) − P VP RE (t)) IP ayP RE , (1.9)
where IP ayP RE is the ”pay fixed” indicator, i.e.,

1, if the swap pays PRE,
IP ayP RE = (1.10)
−1, if the swap pays DI.

2 Example
We consider a pay-PRE Brazilian swap tied to the ODF7 future maturing on 1/2/2017
on the PRE side. The swap was entered into at the PRE rate of 11.85% effective
on 3/20/2007, first accrued interest on 3/21/2007, and was priced on 3/27/2007. The
results are presented in Table 2. Table 1 reflects the PRE and DI rate histories respec-
tively.

References
[1] Brazilian Mercantile and Futures Exchange. Swap contract specifica-
tions, 2007. http://www.bmf.com.br/portal/pages/frame.asp?
idioma=2&area=contratos&link_char=Swaps1.

2
 Table 1: PRE and DI rate histories.

Date ODF quote Overnight rate

3/21/2007 11.7% 12.65%
3/22/2007 11.682% 12.63%
3/23/2007 11.71% 12.61%
3/26/2007 11.695% 12.6%

Table 2: Brazilian swap price calculation.

Parameter Value Computation

Underlying futures ODF7
Effective date 3/20/2007
Valuation date 3/27/2007
Last history date 3/26/2007
1
”Rate” Accrual factor 1.001888628 [1.1265 × 1.1263 × 1.1261 × 1.126] 252
Current ”ODF” quote 11.695
Days to ”ODF” maturity 2457
Nominal notional, BRL 1,000,000
”Strike” 11.85
Days to mat. at trade 2461
# of accrual days 4
4
”ODF” Accrual factor 1.001779176 1.1185 252
2461
discount factor at val date 0.334986352 1.1185− 252
2461
Trade notional, BRL 334,986.35 1, 000, 000 × 1.1185− 252
Pay PRE? 1
 1.185
 2457
Price per notional, PRE 340,150.50 1.1695 × 334, 986.35 × 1.001779176
252

Accrual, PRE 5,164.14 340, 150.50 − 334, 986.35

Price per notional, DI 335,619.02 334, 986.35 × 1.001888628
Accrual, DI 632.66 335, 619.02 − 334, 986.35
Total 4,531.48 5, 164.14 − 632.66