BM&FBOVESPA Ibovespa

IBOVESPA

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BM&FBOVESPA Ibovespa

Table of contents

Presentation...................................................................................................................... 3
What is the Bovespa index? ............................................................................................. 3
Objective........................................................................................................................... 4
Ibovespa’s representativity ............................................................................................... 4
Disclosure and monitoring ................................................................................................ 4
Methodologic aspects ....................................................................................................... 5
Calculation of the Bovespa index ..................................................................................... 6
Special procedures ........................................................................................................... 9

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BM&FBOVESPA Ibovespa

Presentation
The Bovespa Index is the main indicator of the Brazilian stock market’s average
performance. Ibovespa’s relevance comes from two facts: it reflects the variation of
BOVESPA’s most traded stocks and it has tradition, having maintained the integrity of its
historical series without any methodological change since its inception in 1968.

What is the Bovespa Index?

It is the current value, in Brazilian currency, of a theoretical stock portfolio constituted in

02/01/1968 (base value: 100 points), by a hypothetical investment. No additional
investment has been made since this date, apart from the reinvestment of the distributed
benefits (such as dividends, subscription rights and stocks bonuses). In that way, the index
reflects not only the variation of the stock prices but also the impact of the distribution of
benefits, and is considered an indicator that evaluates the total return of its components
stocks.

Extremely reliable and with a methodology easily understandable by the market, the
Bovespa Index represents faithfully the average performance of the main traded stocks
and the profile of the cash market operations carried out on BOVESPA.

(*) The index has suffered, only for disclosure purposes and without any loss to its
calculation methodology, the following changes:

1 – division by 100, on 10/03/1983;

2 – division by 10, on 12/02/1985;
3 – division by 10, on 08/29/1988;
4 – division by 10, on 04/14/1989;
5 – division by 10, on 01/12/1990;
6 – division by 10, on 05/28/1991;
7 – division by 10, on 01/21/1992;
8 – division by 10, on 01/26/1993;
9 – division by 10, on 08/27/1993;
10 – division by 10, on 02/10/1994;
11 – division by 10, on 03/03/1997.

Objective

Ibovespa’s basic objective is to be an average indicator of the market performance. For

that purpose, its composition aims at reflecting as close as possible the real configuration
of the cash market operations (round lot) on BOVESPA.

Ibovespa’s Representativity

a. In terms of liquidity:
The stocks that integrate Ibovespa’s theoretical portfolio represent more than 80%

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BM&FBOVESPA Ibovespa

of the number of trades and the financial value registered on BOVESPA’s cash
market (round lot).

b. In terms of market capitalization:

The issuing companies of the stocks that compose the Bovespa Index theoretical
portfolio are responsible, in average, for approximately 70% of the sum of all
BOVESPA’s companies’ capitalization.

Disclosure and Monitoring

BOVESPA calculates Ibovespa in real time, considering the prices of the last trades
carried out in the cash market (round lot) with the stocks that compose its portfolio.

Its disclosure is made through BOVESPA’s diffusion system and is also retransmitted by
many "vendors", thus making it possible to monitor the index performance "on line" in any
part of Brazil or of the world.

Transparency

Ibovespa’s reliability comes from its simple calculation methodology, and also from the
availability of its data to the investor public. The market recognizes the index’s positive
characteristics, and this recognition is expressed by the fact that Ibovespa is the only
performance indicator of the Brazilian stocks that has a liquid future market (one of the
biggest index future market of the world).

Security, Reliability and Independence

Bovespa is responsible for Ibovespa’s management, calculation, disclosure and

maintenance. This responsibility assures the strict compliance with the rules and technical
procedures contained in the index methodology.

Methodologic Aspects

Criteria for Inclusion in the Portfolio

The Ibovespa theoretical portfolio is composed by the stocks that meet the following
criteria, in regard to the last twelve months:

• to be included in the group of stocks whose negotiability indexes added represent

80% of the total value of all individual negotiability indexes;
• to have a trading value participation higher than 0,1% of the total;
• to have a trading session presence of more than 80%.

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Participation of the Stock in the Theoretical Portfolio

The participation of each stock in the portfolio has a straight relation with its
representativity in the cash market – in terms of number of trades and financial value –
adjusted to the sample´s size. This representativity is obtained by the negotiability index,
calculated according to the following formula:

IN =

where:
IN = negotiability index
ni = number of trades carried out with stock "i" on BOVESPA cash market (round lot)
N = total numbers of trades carried out on BOVESPA cash market (round-lot)
vi = financial value generated by the trades carried out with share "i" on BOVESPA cash
market (round-lot)
V = total financial value of BOVESPA cash market (round-lot)

Note: In the calculation of the negotiability index, cross trades are not considered.

Criteria for Exclusion from the Portfolio

A stock selected to compose the portfolio will only be excluded when it no longer meets at
least two of the criteria of inclusion.

It should be noted that companies that are in a regime of judicial reorganization, files for
bankruptcy, are in a special situation or subject for a long period of trade suspension will not
integrate Ibovespa. If a company is no longer in any of these exceptional situations, its trading
history shall begin to be counted - in order to meet the all of the criteria for inclusion in the
portfolio - as of the date on which BM&FBOVESPA considers that the company has effectively
come out of its exceptional situation.

Calculation of Bovespa Index

The Bovespa Index is the sum of the weights (stock theoretical quantity multiplied by its
last price) of the stocks that integrates the theoretical portfolio. In this sense, it can be
calculated, at any time, according to the following formula:

Ibovespa t =

where:
Ibovespa t = Bovespa Index at moment "t"
n = total number of stocks that compose the theoretical portfolio
P = last price of stock "i" at moment "t"
Q = theoretical quantity of stock "i" in the portfolio at moment "t"

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Suspension of Trading

In case of suspension of a component share, the index will use the price of the last trade
registered on the Exchange until the resumption of trading. If trading is not permitted for a
period of 50 days, as of the date of suspension, or if there are no perspectives that trading
will be resumed, or in case of rebalancing of the portfolio, the share will be excluded from
the portfolio. In such a case, the necessary adjustments will be made to ensure the
continuity of the index.

Term of the Portfolio

To ensure Ibovespa’s representativity along the time, its portfolio is recalculated at the end
of each four months, according to the procedures and criteria of this methodology. At the
rebalancings, the changes in the relative participation of each stock in the index are
identified, as well as their maintenance or exclusion, and possible inclusions of new
papers are defined.

Ibovespa’s theoretical portfolio will be valid for four months, for the periods of January to
April, May to August and September to December.

Procedures for Rebalancing

In the four month rebalancing the following procedures will be adopted:

• BOVESPA calculates the negotiability index for each traded stock considering the
last twelve months. These indexes are ranked in decreasing order, and a column
shows the accumulated sum of the indexes from the highest to the lowest one.
Then the participation of each individual negotiability index is calculated in relation
to the total sum, and the stocks whose accumulated participation reaches 80% are
listed.

• The listed stocks will compose the index portfolio once they meet the two other
criteria of inclusion. A stock which does not meet these criteria will be substituted
by the following stocks in the list which meet those parameters.

• The next step is to identify, between the stocks that belong to the current portfolio,
if any of them will be excluded.

• The negotiability index of the chosen stocks are listed again, and the participation
percentage of each stock in relation to the total sum of all negotiability indexes is
calculated.

• The adjusted participation of each stock multiplied by the index value of the last
day of the previous four month period will determine the initial "weight" (number of
index points) of each stock.

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• Each stock’s theoretical quantity, resulting from the division of its share in the index
composition (weight) by its closing price of the last day of the previous four month
period, will remain constant for the four months of the new portfolio, and will only
be modified in the case of a benefit distribution (dividends, stock bonuses,
subscriptions, etc.) by the issuing company.

See example of Ibovespa rebalancing and calculation

Portfolio´s Previews

Aiming at helping the market participants who use Ibovespa portfolio as an instrument to
elaborate their investment polices, BOVESPA regularly discloses three previews of the
new composition 30 days before, 15 days before and 1 day before of the new portfolio for
the next four months. In special situations, however, Bovespa may anticipate the previews
disclosure and/or increase their number in order to calm the market.

Index Adjustments

So as to measure the total return on its theoretical portfolio, the Ibovespa will be adjusted
for all benefits distributed by the issuing companies of the shares included in the portfolio.

The adjustment is made considering that the investor sold the stocks at the closing price of
the last trading day prior to the benefit distribution and used the resources to buy the same
shares without the benefit (i.e., at the "ex-theoretical" price).

Formula for adjustments in the theoretical quantity

(in the case of benefit distribution)

where:
Qn = adjusted share quantity
Qo = previous share quantity
Pc = last price before the benefit distribution
Pex = ex-theoretical price, calculated based on Pc

General formula for calculation of the "ex-theoretical" price

where:
Pex = ex-theoretical price
Pc = last price before the benefit distribution

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S = percentage of subscription, in index number

Z = issuing value of the share to be subscribed, in Brazilian currency
D = dividends received per share, in Brazilian currency
J = interest on capital, in Brazilian currency
Vet = theoretical economic value per share, resulting from benefits distributed in another
share type/asset
B = percentage of bonus (or split), in index number

Note: The Vet is calculated considering the financial amount which would be obtained from
the sale of shares of another type and/or other assets (debentures, shares of another
company, etc.) received. For example, suppose that company A is distributing to its
shareholders, free of charge, one share of company B for every two shares held of
company A, and that the shares of company B are evaluated at $ 5.00/share. In this case,
the Vet will be equal to $2.50

Special Procedures

1. Adjustments in the Case of Company Spin-Off

1.a) Announcement/effect of the spin-off

The announcement of the issuing company’s decision to make a spin-off does not alter its
situation in the index theoretical portfolio.

Once the spin-off has been made and while awaiting the resulting companies to be
operational and registered, these companies will be considered as a trading unit and will
remain in the index portfolio.

For the purposes of trading on BOVESPA, the effect of the spin-off means the act by
which the shares of the companies resultant from the spin-off start to be traded on the
trading session.

1.b) Beginning of trading on the stock exchange of the companies resulting from the
spin-off

The index theoretical portfolio will include the companies resulting from the spin-off. The
participation presented by the original company in the theoretical portfolio will be
distributed among the resulting companies.

For each company included in the index, the share quantity and the theoretical price will
be determined in function of the spin-off ratio informed by the company.

1.c) Next four-month re-compositions

For the selection of the companies/shares that cumulatively meet the criteria for inclusion,
the following procedures will be adopted:

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• the companies resulting from the spin-off will be treated as a trading unit and their
negotiability data will be considered in conjunction with those of the spun-off
company;
• the individual participation of each new stock in the portfolio will be defined at
BOVESPA’s discretion and based on the elapsed period, in function of the effective
negotiability of each stock or in function of the price level of each asset;
• until an entire rebalancing period of the trading of the individual companies is
complete (minimum of four months, maximum of seven months), BOVESPA will
maintain in the index portfolio the stocks with the same theoretical quantity;
• at the recompositions made after this minimum period, BOVESPA will continue to
use on the analysis of the last 12 months the data as described above, but the
participation of each company in the Ibovespa will be defined in function of its
individual performance considering the available period of individual trading;
• when 12 months have passed following the spin-off BOVESPA will exclude those
stocks that fail to present a suitable trading profile, based on their presence on the
trading session, number of trades and financial value.

See example of adjustment in case of Spin-off

2. Adjustments in the Case of Public Offerings

Whenever a company launches a public offering that results in the acquisition of a

significant proportion of the outstanding shares, BOVESPA may adopt one of the following
procedures:

a. when the acquisition is lower than 2/3 (two thirds) of the outstanding shares,
removal from the index of the percentage of outstanding shares bought by the
company and distribute the relative participation of this percentage proportionality
to the other component stocks; or
b. removal of the share from the index when the acquisition is higher than 2/3 (two
thirds) of the outstanding shares, and distribute its relative participation in the
portfolio proportionality to the other component stocks (the same procedure
adopted for companies that enter a regime of judicial reorganization, bankruptcy or
are no longer listed on the stock exchange).

3. Adjustments in the Case of Mergers

3.a) Company with shares included in the index merges with company whose
shares also belong to the index

The shares of the incorporating company remain in the index, and its theoretical quantity is
adjusted in function of the exchange ratio between the stocks of the incorporated and of
the incorporating companies.

3.b) Company with shares included in the index merges with company whose
shares do not belong to the index

The shares of the incorporating company remain in the index with the same theoretical quantity.

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3.c) Company with shares included in the index is incorporated by company whose
shares are not included in the index

This situation will be analyzed on a case-by-case basis, and BOVESPA may, at its own
discretion:

• exclude the share from the index, redistributing its participation for the other stocks
of the portfolio;
• substitute the share of the incorporated company for shares of the incorporating
company, making the necessary adjustments in the theoretical quantity in function
of the exchange ratio between the stocks.

Note: In any situation, on the occasion of the four-month reevaluations, the negotiability
data of the incorporated company will be added to those of the incorporating company.

Example of Ibovespa Rebalancing and Calculation

In the calculation of the new portfolio, all transactions carried out on BOVESPA’s cash
market (round-lot) during the last twelve months are considered. For example purposes,
the data shown below will represent the whole stock market, and the calculation of the
negotiability index will be made based on the market total figures (and not based on the
daily figures).

Stock Number of Value (R$) Trading Closing Quotation

Trades Session**Presence
On T+0 On T+1
* AAA PN 150.000 3.200.000 235 2,80 2,90
BBB ON 80.000 400.000 190 100,00 95,00
* BBB PN 230.000 1.200.000 245 85,00 83,00
CCC PNA 105.000 800.000 245 620,00 610,00
DDD ON 10.000 105.000 195 15,00 16,00
EEE ON 15.000 220.000 206 105,00 115,00
EEE PNA 55.000 500.000 240 120,00 123,00
FFF PN 8.000 70.000 200 0,95 1,03
* GGG ON 2.000 8.000 180 225,00 224,00
HHH ON 12.000 130.000 201 10,00 9,90
* HHH PN 120.000 1.600.000 250 10,50 10,45
* III ON 15.000 150.000 205 320,00 330,00
JJJ ON 4.000 50.000 130 45,00 46,00
JJJ PN 20.000 250.000 197 47,00 47,50
Total 826.000 8.683.000 - - -

*Shares included in the old portfolio.

**There were 250 trading sessions at the period.

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The first step for the index calculation consists in calculating the stock participation in
terms of trading value, number of trades and trading session presence, and also to
calculate their negotiability index, as shown in the table below.

Stock Participation (%) Negotiability Index Presence**

N° Trades Value (R$) Part. % Trading Part. %
(1) (2) Sessions
* AAA PN 18,16 36,85 25,87 26,85 235 94,00
BBB ON 9,69 4,61 6,68 6,93 190 76,00
* BBB PN 27,85 13,82 19,62 20,36 245 98,00
CCC PNA 12,71 9,21 10,82 11,23 245 98,00
DDD ON 1,21 1,21 1,21 1,26 195 78,00
EEE ON 1,82 2,53 2,15 2,23 206 82,40
EEE PNA 6,66 5,76 6,19 6,43 240 96,00
FFF PN 0,97 0,81 0,88 0,92 200 80,00
* GGG ON 0,24 0,09 0,15 0,16 180 72,00
HHH ON 1,45 1,50 1,47 1,53 201 80,40
* HHH PN 14,53 18,43 16,36 16,98 250 100,00
* III ON 1,82 1,73 1,77 1,84 205 82,00
JJJ ON 0,48 0,58 0,53 0,55 130 52,00
JJJ PN 2,42 2,88 2,64 2,74 197 78,80
Total 100,00 100,00 96,34 100,00 - -

*Shares included in the old portfolio.

**There were 250 trading sessions at the period.

The stocks should then be classified in descending order according to the negotiability
index, and it should be verified if they meet or not the inclusion/exclusion criteria.

Stock Participation (%) Negotiability Index

Presence** Value (R$) Index Part. % Accum.
Part. %
* AAA PN 94,00 36,85 25,87 26,85 26,85
* BBB PN 98,00 13,82 19,62 20,36 47,21
* HHH PN 100,00 18,43 16,36 16,98 64,19
CCC PNA 98,00 9,21 10,82 11,23 75,43
BBB ON 76,00 4,61 6,68 6,93 82,36
EEE PNA 96,00 5,76 6,19 6,43 88,79
JJJ PN 78,80 2,88 2,64 2,74 91,53
EEE ON 82,40 2,53 2,15 2,23 93,75
* III ON 82,00 1,73 1,77 1,84 95,59

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HHH ON 80,40 1,50 1,47 1,53 97,12

DDD ON 78,00 1,21 1,21 1,26 98,38
FFF PN 80,00 0,81 0,88 0,92 99,30
JJJ ON 52,00 0,58 0,53 0,55 99,84
* GGG ON 72,00 0,09 0,15 0,16 100,00
Total - 100,00 96,34 100,00 -

*Shares included in the old portfolio.

**There were 250 trading sessions at the period.

The next step is to select the stocks that will compose the new portfolio.

Stock Trading Session Neg. Ind. Neg. Ind. Adjust.

Presence** (%) Part. %
* AAA PN 94,00 25,87 32,08
* BBB PN 98,00 19,62 24,33
* HHH PN 100,00 16,36 20,29
CCC PNA 98,00 10,82 13,42
EEE PNA 96,00 6,19 7,68
* III ON 82,00 1,77 2,20
Total - 80,63 100,00

*Shares included in the old portfolio.

**There were 250 trading sessions at the period.

The new portfolio is then established supposing that the closing index of T+0 has been
10.000 points (referent to the previous portfolio).

Stock Neg. Ind. Adjust. Index Points Quotations on Theoretical

Part. % (a) (a)*10.000=(b) T+0 (c) Quantity (b) / (c)
AAA PN 32,0832 3.208,3209 2,80 1.145,8289
BBB PN 24,3283 2.432,8298 85,00 28,6215
HHH PN 20,2912 2.029,1203 10,50 193,2496
CCC PNA 13,4214 1.342,1369 620,00 2,1647
EEE PNA 7,6793 767,9334 120,00 6,3994
III ON 2,1966 219,6587 320,00 0,6864
Total 100,00 10.000,00 - 1.376,9506

Once the portfolio is constituted, the calculation of the index at the end of T+1 is effected
based on the prices of the component stocks for this day, as explained below:

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Stock Theoretical Quotations on Index Points Variation (%) on

Quantity (d) T+1 (e) (d)*(e) T+1
AAA PN 1.145,8289 2,90 3.322,9038 3,57%
BBB PN 28,6215 83,00 2.375,5867 -2,35%
HHH PN 193,2496 10,45 2.019,4578 -0,48%
CCC PNA 2,1647 610,00 1.320,4896 -1,61%
EEE PNA 6,3994 123,00 787,1317 2,50%
III ON 0,6864 330,00 226,5231 3,13%
Total 1.376,9506 - 10.052,09 0,52%

Example of Adjustment in Case of Spin-off

Company A was spun-off, giving rise to companies B (which holds 45% of the net worth of
A), C (which holds 30%) and D (25%). Supposing that the participation of A in the index
was 20%, the situations immediately prior to and subsequent to the start of trading of the
spun-off companies would be as follows:

Closing of the trading session prior to the start of trading of the spun-off companies:

Company´s Theoretical Share Price (2) Ibovespa Participation in

Shares Quantity (1) Points (1)x(2) the Index (%)
A 1.000 2,00 2.000 20,0
Other stocks - - 8.000 80,0
Ibovespa - - 10.000 100,0

Opening of the trading session of the first trading date of the spun-off companies:

Company´s Theoretical Share Price (2) Ibovespa Participation in

Shares Quantity (1) Points (1)x(2) the Index (%)
B 1.000 0,90 900 9,0
C 1.000 0,60 600 6,0
D 1.000 0,50 500 5,0
Other stocks - - 8.000 80,0
Ibovespa - - 10.000 100,0

Note: The example supposes that, in the spin-off, there was no reduction in the number of
shares, but rather the distribution of shares of the companies resulting from the spin-off, in
a quantity equivalent to that previously held. If the deliberation of the company is different,
the procedures will be adapted, but the logic behind the adjustment will be identical.

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