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The Journal of Structured Finance

The Journal of Structured Finance

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Article

Pricing Brazilian ABS to Trade in the Secondary Market: Benefits from Assimilating Best Pricing Practices

Vernon H. Budinger and Mark D. Wainger
The Journal of Structured Finance Fall 2012, 18 (3) 50-61; DOI: https://doi.org/10.3905/jsf.2012.18.3.050
Vernon H. Budinger
is a principal partner at Latin America Structured Finance Engineer, LLC, in Monrovia, CA.
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  • For correspondence: vbudinger@latamsfc.com
Mark D. Wainger
is a principal partner at Latin America Structured Finance Engineer, LLC, in New York, NY.
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Abstract

Brazilian asset-backed securities (ABS) appeal to investors because of their relatively high yields and diversification benefits. However, Brazilian and international investors struggle to price these ABS because of the country’s unique financial calculations, lack of transparency, and the scarcity of quantitative pricing tools in Brazil. Even Bloomberg presents these securities with analytical tools for mutual funds rather than for typical ABS. Brazil’s lack of standardization with respect to calculations and documentation compounds the pricing problems. This forces pricing tools to use more-complicated algorithms and pricing models. The authors show that this extra work is worth the effort. Arbitrage-free pricing models provide more insight into the potential returns and risks embedded in the shares (tranches) of a Brazilian ABS. They also propose norms for standardizing the information needed to trade in secondary markets for Fundos de Investimento em Direitos Creditórios (FIDCs—the most prevalent ABS vehicle). All market participants would benefit from the increased liquidity and capital flows that would result from adopting the best practices for pricing described in this article.

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The Journal of Structured Finance: 18 (3)
The Journal of Structured Finance
Vol. 18, Issue 3
Fall 2012
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Pricing Brazilian ABS to Trade in the Secondary Market: Benefits from Assimilating Best Pricing Practices
Vernon H. Budinger, Mark D. Wainger
The Journal of Structured Finance Oct 2012, 18 (3) 50-61; DOI: 10.3905/jsf.2012.18.3.050

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Pricing Brazilian ABS to Trade in the Secondary Market: Benefits from Assimilating Best Pricing Practices
Vernon H. Budinger, Mark D. Wainger
The Journal of Structured Finance Oct 2012, 18 (3) 50-61; DOI: 10.3905/jsf.2012.18.3.050
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  • Article
    • Abstract
    • PRICING CHALLENGES OF BRAZILIAN FIDCs
    • ADVANTAGES OF USING QUANTITATIVE PRICING METHODOLOGY
    • OPEN FIDC VERSUS CLOSED FIDC
    • COUPON CALCULATIONS, BOOK VALUE PRICING, AND AMORTIZATION FOR CLOSED FIDCs
    • MARKING FIDCs TO MARKET
    • OPTION-ADJUSTED SPREAD TECHNOLOGY
    • CONCLUSION AND RECOMMENDATIONS
    • REFERENCES
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  • PDF (Subscribers Only)

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