Blue Chip Swap

Blue Chip Swap describes a type of international asset trading in which an investor purchases a foreign asset, usually at a depreciated local price, and then trades that asset in a domestic trade, usually capitalizing on a depreciated exchange rate.

Blue Chip Swap is a term used in the common and financial press to describe a type of international asset trading which rose to prominence in South America in the 1990’s and early 2000’s, particularly in Brazil and Argentina.

Sometimes also known as a Brazilian Swap, a blue chip swap is performed when a domestic investor purchases a foreign asset, including bonds or currency, and then transfers that asset to an offshore domestic bank branch. Funds from the foreign asset are subsequently transferred to a bank account in the domestic country. In most cases, the domestic investor works with a partner who transfers assets to the foreign branch on their behalf.

Blue chip swaps can be extremely profitable for some investors when there is an imbalance of equilibrium exchange rates, or the exchange rate at which the supply for currency meets the demand.

Blue chip swaps initially became possible via Brazilian and Argentinian capital control laws that reduced the amount of capital flow into the country. While this law prohibited direct foreign investments in the country's derivative markets, blue chip swaps allowed continued derivative market investments.

While such trades were unregulated for many years, control regulations began to emerge which imposed minimum holding periods for bonds transferred abroad. Under Argentinian law, the seller of a bond is currently required to have it in stock for 72 hours or more.

This type of exchange became prominent in Argentina due to a economic history of that nation to save its wealth in U.S. dollars, in response to a long history inflation crises in the country stretching back to the 1970’s. These crises decreased confidence in the Argentinian peso, and a particularly severe period of hyperinflation in Argentina between 1989 and 1990.

In response, Argentina implemented a fixed exchange rate in 1991. Sometimes referred to as the Convertability Plan, this rate tied the Argentinian peso to the US dollar in a one-to-one relationship. This plan increased interest rates and led to a recession which lasted into the early 2000's. For the following decade, Argentina abandoned the fixed-rate plan in favor of a managed float plan that sent the exchange rate for the peso plummeting in relationship to the dollar and giving rise another rise to the blue chip swap market. While Argentina has imposed much stricter controls on exchange rate fluctuations since 2011, blue chip swaps continue to serve as profitable measures for traders.