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Exchange-Rate Risk Mitigation with Price-Level-Adjusting Mortgages:The Case of the Mexican UDI

Author

Listed:
  • Joseph Lipscomb
  • John Harvey
  • Harold Hunt

Abstract

In 1995, Mexico introduced a credit system based on a price-level-adjusting unit of account called the Unidad de Inversion (UDI), which is Spanish for unit of investment. The Bank of Mexico maintains an UDI Index, which sets the peso value of an UDI on any given day. Loans denominated in UDIs maintain their purchasing power and provide a real rate of return in the local currency, pesos. The focus of this study is the real rate of return earned by dollar investors in UDI mortgages. Most dollar investors fear exposure to exchange rate losses in unstable currencies. We examine exchange rate patterns relative to purchasing-power-parity to find investment timing strategies that cause dollar investments in Mexicoís UDI mortgages to earn a real rate of return that equals or exceeds the fixed real rates earned by peso investors.

Suggested Citation

  • Joseph Lipscomb & John Harvey & Harold Hunt, 2001. "Exchange-Rate Risk Mitigation with Price-Level-Adjusting Mortgages:The Case of the Mexican UDI," ERES eres2001_213, European Real Estate Society (ERES).
    • Handle: RePEc:arz:wpaper:eres2001_213
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    JEL classification:

    • R3 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Real Estate Markets, Spatial Production Analysis, and Firm Location

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