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I am trying to understand the role of cupom cambial (onshore dollar rate) in relation to the BCB swaps which are domestic NDF settled in real.

"The cupom cambial is priced in basis points as an interest rate equal to the spread between the overnight interbank deposit interest rate and the exchange rate variation prior to maturity of the contract. As a matter of interest rate parity, the Cupom Cambial is economic equivalent to the onshore U.S. dollar interest rate"

Can you explain why the the covered interest parity implies that the cupom cambial is the onshore USD rate? A numerical example would help...

Student
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  • The "for dummies" explanation: Although the Brazilian Real is not a freely convertible currency, there is a futures market in Brazil where the BRLUSD exchange rate is quoted for forward delivery (this market is settled in BRL, no USD actually changes hands). The BRL interest rate and the spot exchange rate are known. Using all this it is possible, using the CIP equation (which ties together spot, forward and the 2 interest rates), to calculate the (implied) interest rate on USD that keeps the forward and spot market in balance. And this implied rate is called the "cupom cambial". – nbbo2 Feb 14 '21 at 14:32
  • Makes sense, assuming USDBRL, you get the cupom cambial using F= S*(1+ BRL_rate)/(1+USD_rate). Would the cupom cambial be different from the USD offshore rate implied from a NDF (under normal circumstances)? – Student Feb 15 '21 at 15:34

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