Institutionality of the foreign exchange market and exchange rate policy in Brazil

This paper aims to analyze the exchange rate policy in Brazil from an approach centered on the institutionality of the Brazilian foreign exchange market. For this, it first describes the operation of this market by separating it into four levels (spot, interbank, derivatives and offshore markets) based on interviews’ information with agents of the foreign exchange market, as financial currency traders, agents of the BM&F, Central Bank, Treasury and Finance Ministry. From this analysis, it is evaluated how this institutionality affects exchange policies rate in Brazil (such as Central Bank intervention, capital flows controls, the regulation on banks spot position and the derivative transactions taxes) and, in particular, how these policies impact the exchange rate considering the intermediary channels as the arbitration between spot and future markets, the formation of future prices and the disincentives to speculative operations.

Foreign exchange; Exchange rate policy; Derivatives; Capital controls