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

March 2, 2018

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Format: Chicago

Chang Ma, and Fabian Valencia. Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk, (USA: International Monetary Fund, 2018) accessed September 18, 2024

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.

Summary

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.

Subject: Asset prices, Financial institutions, Financial regulation and supervision, Hedging, Income, National accounts, Oil prices, Options, Personal income, Prices

Keywords: Asset prices, Averse investor, B welfare, Bond price, Commodity exporters, Commodity-price swing, Cost premium, Default, Default incentive, Global, Hedging, Hedging economy, Hedging increases social welfare, Hedging program, Income, Oil price process, Oil price risk, Oil prices, Options, Personal income, Present discounted value, Sovereign debt, Strike price, Welfare gain, WP

Publication Details

Pages:

39
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2018/035
Stock No:

WPIEA2018035
ISBN:

9781484344163
ISSN:

1018-5941

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