This paper investigates the distinctive dynamics of Brazil's domestic currency derivatives market, which exhibits remarkable activity compared to other emerging markets. Specifically, we examine the consequences of this market structure by contrasting Deliverable Forward markets, Offshore Non-Deliverable Forward markets, and the prevalent Domestic Non-Deliverable Forward markets in Brazil. Our model incorporates interactions between domestic and foreign consumers in spot and forward markets, alongside financial intermediaries and a government constrained by foreign currency debts and obligations. We find that under controlled external debt and minimal external risk, these markets function equivalently. However, the emergence of convertibility risk disrupts this equivalence, particularly evident in scenarios similar to Brazil's experiences in 2002.
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