Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
40 Pages Posted: 14 Mar 2018
Date Written: March 2018
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