Cover IMF Working Papers
Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
Author:
Chang Manull

Search for other papers by Chang Ma in
Current site
Google Scholar
PubMedClose
and
Mr. Fabian Valencia
Search for other papers by Mr. Fabian Valencia in
Current site
Google Scholar
PubMedClose
Series:
IMF Working Papers
Volume/Issue:
Volume 2018: Issue 035
Language:
English
Publication Date:
02 Mar 2018
DOI:
https://doi.org/10.5089/9781484344163.001
ISBN:
9781484344163
ISSN:
1018-5941
Pages:
39
Keywords:
WP; strike price; present discounted value; Hedging; Commodity exporters; Sovereign debt; Default; welfare gain; hedging economy; cost premium; bond price; hedging program; default incentive; hedging increases social welfare; commodity-price swing; Oil prices; Personal income; Options; Asset prices; Global; oil price risk; B welfare; oil price process; averse investor; Income
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Download PDF (1.9 MB) Download Epub
Over the past two decades, Mexico has hedged oil price risk through the purchase of put options. We examine the resulting welfare gains using a standard sovereign default model calibrated to Mexican data. We show that hedging increases welfare by reducing income volatility and reducing risk spreads on sovereign debt. We find welfare gains equivalent to a permanent increase in consumption of 0.44 percent with 90 percent of these gains stemming from lower risk spreads.
  • Collapse
  • Expand
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund
Volume 2018: Issue 035