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Brazil Investors Can Seek Options Markets
Brazil Investors Can Seek Options Markets

Brazil Investors Can Seek Options Markets

Brazil Investors Can Seek Options Markets

Investors are fleeing Brazil, yet option prices indicate that Latin America’s biggest economy should still be able to implement reforms that will benefit growth despite a corruption scandal that has ensnared President Michel Temer.

The benchmark Bovespa index of stocks slumped 8.8% following a May 18 report that Temer condoned a deal to pay the jailed former House Speaker Eduardo Cunha to not testify in the country’s biggest graft probe, Bloomberg reported.

The benchmark’s biggest one-day drop since the 2008 financial crisis came amid heightened uncertainty and concern that Temer’s implication in the scandal would prevent him from instituting a program of reforms considered critical to lifting Brazil out of a two-year downturn that saw the economy shrink 3% last year.

Leading lawmakers and a third of Temer’s cabinet have been implicated in the Operation Carwash scandal, which has uncovered systematic bribery of public officials in return for contracts with state-owned and private companies.

The Bovespa is little changed since the news emerged and options prices suggest the worst is over for the country in terms of damaging corporate and political revelations. More specifically, options prices on the Bovespa stock index indicate that the potential for the country’s equities outweigh the risk. In other words, the options market predicts that investors will receive more upside for the amount of downside risk they bear, making for an attractive investment.

Much like a corporation that recovers after revealing a slew of damaging news in one fell swoop—a so-called big-bath write-down—Brazil may now be in a position to focus on its problems, rather than ignore them, and implement the changes necessary to restore growth and the integrity of the political system.

Shares in Royal Dutch Shell Plc climbed 35% in 14 months after it took an $8.2 billion charge in October 2015 because of failed exploration projects in Alaska and elsewhere. Volkswagen AG has become the world’s biggest carmaker by volume and its shares advanced 23% in two months after it took a $7.5 billion write down, also in October 2015, following an admission that it had cheated on emissions tests for diesel vehicles.

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