Spread Futures IGP-M

Spread Futures IGP-M


1. What is it?

The Spread Futures IGP-M Contract was created by the Brazilian Stock Exchange (BM&F) on October 28th, 2002 as a hedging tool for IGP-M (General Market Price Index) based investments. The object for IGP-M futures is the index itself expressed in 100.000 points and calculated by the Brazilian Economy Institute (or IBRE, in Portuguese) at the FGV University in Brazil.

The main function of the futures contract IGP-M is to provide protection against the risk of the real interest rate in Brazil, being widely used as hedging instruments indexed to the IGP-M bonds.

The dealing rates represent the changes within the actual interest tax rates between the operation and the expiry date, or the DI rates for such period minus the average IGP-M inflation index for the same period of time.

IGP-M futures rates are ‘clean’, as they do not keep a memory of previous indexes. By combining IGP-M futures with DI futures, it is possible to deal with inflation perspectives for the negotiable period.

2. Characteristics

The Spread Futures IGP-M Contract has some peculiar characteristics, as follows:


Spread futures IGP-M terminology follows a pattern:

1. The Spread Futures IGP-M Contract futures code is “DDM”.

2. The letter corresponds to the expiry month, as follows:

Month Letter
January F
February G
March H
April J
May K
June M
July N
August Q
September U
October V
November X
December Z

*International Standards

Example: to deal with a Spread Futures IGP-M Contract expiring in February 2014, we have the following code:

DDM G 14

Unit price (PU)

Unit prices for IGP-M futures are multiplied by 100,000 and expressed in BRL. Quotations, though, are expressed in annualized interest tax rates, considering 252 work days, and with up to 3 decimal places. By the expiry date, PU will be worth 100,000 points.

The PU position is daily updated according to DI rates minus the pro rata inflation rate for that day. That assures the contract to worth the exact difference between the negotiated interest rate and the actual rate, by the expiry date. IGP-M futures rates are ‘clean’, as they do not keep a memory of previous indexes


Expiry dates can be place in any of the four subsequential months after the operation, and then by the beginning of each quarter. The maturity will be the first business day of the delivery month. For instance, a DDM traded in February can have the expiry dates placed in March, April, May or June, and then by July, October, or January next year and so on. This way, expiry dates align with DI futures, which gives an extra incentive to close longer deals on DDMs. However, the last trading day is the fifth prior to the expiration workday.

Day trade

It is possible to close a day trade (buying and selling futures with same expiry date in a same day) of DDM futures.

Daily settlement

The daily change is nothing more than a mechanism used by BMF&Bovespa to balance the investor accounts. As futures change in a daily basis, generating credits or debts, investors are daily updated on their positions, earning or losing as prices change – in other words, they either get their profits or pay for their losses daily. The mechanism is a protection against any noncompliance among investors.

For IGP-M futures contracts, the daily change is subject to the following criteria:

1. Converted positions

When buying and selling operations are hired originally over interest rates, they will be then converted to PU values.

2. Daily settlement

Once operations are PU indexed, they will be updated based on daily prices, according to the stock exchange rules. The daily adjustment will occur until the expiry date.

If daily adjustments are positive, and will be credited to PU buyers and deducted from PU sellers. If the adjustment is negative, the opposite happens. By the expiration date, adjustments price will be 100,000.

Guaranty margin

It is a value deposited in cash or notes which will covering any noncompliance of an investor in daily adjustments. Usually to operate options, the investor is forced to deposit a guarantee to mitigate risks. The margin is defined by the stock exchange, according to the analysis of the futures market.

The assets accept as guarantee include cash, gold, government or private bonds, letters of pledge and quotes at funds.

Operational costs

There are basically two costs associated to this kind of investment:

Brokerage – it can change depending on the broker. However, most of them use the basic operational fees, stipulated by Bovespa. In this case, costs reach 3% for regular operations and 1,5% for the day trade, being the difference between the PU adjustment (previous day) and corrected theoretical value of the redemption.

Stock exchange fees–that includes emoluments, being the rate of 0.01% for normal operations and settlement on maturity and 0.005% for Day trade, levied on 100,000 multiplied by the value of each point PU established by the Exchange itself. In addition, there are registration and residence fees, calculated by BM&F itself. Also, ISS tax applies to the service.


By the expiration date, all positions that remain opened, after a last adjustment, wil be financially executed by the stock exchange, by registering the inverse operation of the position held, in the same number of contracts at the price of 100,000 points.

3. Profitability and Risks

Profits and risks for investing in IGP-M futures are related to the changes in the IGP-M inflation index itself and the benchmark interest rates. Thus, we cannot determine precisely what will be the profit or loss from this kind of operation. The only we can do is to be based on historical data and market trends for those indexes.

4. Taxation

Taxes over IGP-M futures follow the same logic of any other variable income investment. Income tax is equal to 15% of the sum of all daily adjustments (if positive) and is charged just when you close a position. Also, income withholding taxes of 0.005% are due over the full amount of gains.

For day trade operations, the income tax reaches 20% of profits, and the withholding tax other 1%.

All costs and fees paid for investing can be deduced from the income tax amount, including those from BMF&Bovespa. In case of losses, a compensation can be applied in any gains in the current month or subsequential months, as long as the operations are similar.

5. Advantages

  • Possibility of hedging for assets that follow the IGP-M index;
  • Alternative for foreign investors looking to offset local inflation effects.

6. Disadvantages

  • Daily adjusments;
  • Guaranty margin;
  • Income tax;
  • High risk profile.

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