Abstract

In 2008, on the brink of the worst financial crisis in decades, West Texas Intermediate (WTI) oil prices plummeted from their peak levels above US$140 per barrel to about US$40 in less than six months. For commodity-exporting countries like Mexico, for which oil revenues represent a substantial portion of total government income, a drop in oil prices of that magnitude could have compromised the public balances of the government and destabilized the economy. However, as it had done on several occasions in the past, Mexico had implemented an oil-hedging program, precisely to buy insurance against an adverse scenario such as the one that it eventually faced. The profits generated by the hedge proved to be a key compensating source of income for the government and greatly contributed to the stabilization of the domestic financial markets in Mexico. In fact, at some point during the crisis, the marked-to-market value of the program was close to $10 billion, an amount that was made public to anchor expectations with regard to the strength of Mexico’s public finances and balance of payments.