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

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  • Chang Ma
  • Mr. Fabian Valencia

Abstract

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.

Suggested Citation

  • Chang Ma & Mr. Fabian Valencia, 2018. "Welfare Gains from Market Insurance: The Case of Mexican Oil Price Risk," IMF Working Papers 2018/035, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2018/035
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    References listed on IDEAS

    as
    1. John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses," Policy Research Notes (PRNs) 94725, The World Bank.
    2. Cristina Arellano, 2008. "Default Risk and Income Fluctuations in Emerging Economies," American Economic Review, American Economic Association, vol. 98(3), pages 690-712, June.
    3. Aguiar, Mark & Gopinath, Gita, 2006. "Defaultable debt, interest rates and the current account," Journal of International Economics, Elsevier, vol. 69(1), pages 64-83, June.
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    Cited by:

    1. Levy, Antoine & Ricci, Luca Antonio & Werner, Alejandro, 2020. "The Sources of Fiscal Fluctuations," CEPR Discussion Papers 15450, C.E.P.R. Discussion Papers.
    2. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.

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