Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk

40 Pages Posted: 14 Mar 2018

See all articles by Fabián Valencia

Fabián Valencia

International Monetary Fund (IMF)

Chang Ma

Fudan University - Fanhai International School of Finance (FISF)

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

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

Fabian V. Valencia (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Chang Ma

Fudan University - Fanhai International School of Finance (FISF) ( email )

China

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