Simplified Cross Currency and Interest Rate Swap Method - USD YTMs to BRL Floating-Rate YTMs

Good afternoon,

I work in the financial markets and I am trying to better understand how to convert USD bond yields of Brazilian companies into BRL yields, so that I can compare them with local benchmarks such as DI, IPCA, and finally with the yields of the same companies' instruments traded in the domestic market.

[Comment: DI is Brazil's interbank deposit rate, the main reference for floating-rate instruments locally. IPCA is the official inflation index. Many local instruments are indexed either to DI or to IPCA.]

My goal is to understand whether the bond issued by the same company is paying more or less than its debentures, CRIs, or CRAs in the local market.

[Comment: Debentures, CRIs (Receivables Certificates related to real estate), and CRAs (related to agribusiness) are common corporate fixed-income instruments in Brazil.]

As far as I understand, the "Curva Dólar x Pré" (Dollar vs. Fixed Rate Curve) published by B3 (the Brazilian Stock Exchange) — commonly referred to as "CDP" — represents the implicit future appreciation of the US dollar embedded within the DI futures curve.

Thus, a "back-of-the-envelope" calculation I have been doing is to add the return of the CDP over the bond yield, across the bond’s maturity period. After that, I subtract the DI futures curve to arrive at the bond’s equivalent “DI+” rate.

[Comment: "DI+" means the spread over the DI rate, a common way to express local fixed-income yields.]

To get to an “IPCA+” rate, I subtract the implied inflation from the DI-adjusted rate.

[Comment: “IPCA+” is the spread over inflation — i.e., real interest rates — and a common metric for comparing fixed income investments in Brazil.]

I know that this method provides an imperfect approximation because, in theory, the correct approach would be to convert all the bond’s cash flows into BRL using the forward FX curve, and then calculate the equivalent BRL yield from there. However, even with a Bloomberg Terminal, this becomes nearly impractical and hard to maintain, due to the sheer amount of data I would need to process to cover the entire universe of bonds I’m analyzing.

[Comment: The more precise method would be a full multi-curve cash flow projection with forward FX hedging, but this is often operationally complex.]

I have seen some reports from BTG [Pactual, a major Brazilian investment bank] that refer to the "FRA curve" for doing these swaps, but they explain the methodology in a rather elusive way, and the whole process is a black box. Besides that, I’m not entirely sure what kind of “FRA” they are referring to, since there is more than one type.

I would guess they are referring to the "Cupom Cambial" (DDI), but in that case, I understand that their methodology would be different from mine, essentially decomposing the DDI from the bond’s YTM.

[Comment: "Cupom Cambial" refers to the implied interest rate differential embedded in non-deliverable forward FX contracts, often measured by the DDI curve (Interbank Deposit rate for Dollar operations).]

Does anyone have experience with this kind of operation and could give me some guidance? I’d be happy to share some of my knowledge and spreadsheets in exchange.

P.S.: when I say "subtract" or "add" interest rates, I mean I'm "decompounding" or "compounding" them ;)