Download This PaperWelfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
40 Pages Posted: 14 Mar 2018
Date Written: March 2018
Abstract
Over the past two decades, Mexico has hedged oil price risk through the purchase of putoptions. We examine the resulting welfare gains using a standard sovereign default modelcalibrated to Mexican data. We show that hedging increases welfare by reducing incomevolatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent toa permanent increase in consumption of 0.44 percent with 90 percent of these gainsstemming from lower risk spreads.
Keywords: Sovereign debt, Mexico, Hedging, Western Hemisphere, Default, Commodity exporters, General
JEL Classification: F30, F40, G10, F3, F4
Suggested Citation: Suggested Citation
Valencia, Fabian V. and Ma, Chang, Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk (March 2018). IMF Working Paper No. 18/35, Available at SSRN: https://ssrn.com/abstract=3140333
Do you have negative results from your research you’d like to share?
Feedback
Feedback to SSRN
If you need immediate assistance, call 877-SSRNHelp (877 777 6435) in the United States, or +1 212 448 2500 outside of the United States, 8:30AM to 6:00PM U.S. Eastern, Monday - Friday.