Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
  • 1 0000000404811396https://isni.org/isni/0000000404811396International Monetary Fund

Contributor Notes

Author’s E-Mail Address: cmal8@jhu.edu, fvalencia@imf.org

Title Page


IMF Working Paper

Western Hemisphere Department

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

Prepared by Chang Ma and Fabian Valencia1

Authorized for distribution by Costas Christou

March 2018

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.

Copyright Page

© 2018 International Monetary Fund

March 2018


  • I Introduction

  • II Mexico’s Oil Hedging Program

  • III Benefits/Costs of Hedging in a Two-period Model

  • IV Model Economy

    • A Benchmark Model with Defaultable Debt and Put Options

    • B An Economy without Put Options

    • C Recursive Equilibrium

  • V Quantitative Analysis

    • A Calibration

    • B Welfare Gains from Hedging

    • C Robustness Check

  • VI Extensions

    • A Selling Oil Forward

    • B Risk Averse Investors

  • VII Conclusion

  • References

  • Appendices

  • I Normalized Economy

  • II Proofs

    • A Proof of Proposition 1

    • B Proof of Proposition 2

    • C Proof of Proposition 3

    • D Proof of Proposition 4

  • III Algorithm

  • IV Estimation of Oil Price Process

  • V Option Pricing

  • Tables

  • 1 Actual Strike Prices from Options

  • 2 Parameters

  • 3 Stochastic Steady State in the Hedging and No-hedging Economies

  • 4 Sensitivity Analysis

  • 5 Welfare Gains from Selling Oil Forward

  • 6 Risk Averse Investors: Hedging and No-hedging Economies

  • Figures

  • 1 Oil Production, Oil Prices, and Sovereign Spreads

  • 2 Mexico’s Oil Hedging Program

  • 3 Two-period Model

  • 4 Welfare Gains, Borrowing, and Probability of Default

  • 5 Bond Price and Sovereign Spreads

  • 6 Event Windows

  • 7 Welfare Gains under Different Cost Premiums

  • 8 Two-period Model with Forwards


Johns Hopkins University and International Monetary Fund, respectively. The authors thank Paolo Cavallino, Costas Christou, Daniel Hardy, Dora Iakova, Olivier Jeanne, Laura Kodres, Anton Korinek, Leonardo Martinez, Hui Miao, Eugenio Rojas (discussant), Damiano Sandri, Alejandro Werner, Woo Jin Choi, and seminar participants at the IMF, the Bank of Mexico, George Washington University Student Research Conference, Spring 2017 Mid-west Macro Conference, 2017 Georgetown Center for Economic Research Biennial Conference, 2017 Asian Meeting of the Econometric Society, and China Meetings of the Econometric Society for valuable comments.

Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk
Author: Chang Ma and Mr. Fabian Valencia