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

Author

Listed:
  • Joseph B. Lipscomb

    (Texas Christian University, Fort Worth, TX 76129)

  • John T. Harvey

    (Texas Christian University, Fort Worth, TX 76129)

  • Harold Hunt

    (Texas A&M University, College Station, TX 77843-2115)

Abstract

In 1995, Mexico introduced a credit system based on a price-level-adjusting unit of account called the Unidad de Inversion (UDI, pronounced “oo-dee†), 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. In this paper, we examine the real-dollar rate of return and the extent to which the inflation adjusting aspect of the UDI mitigates the losses from currency devaluations. We also examine exchange-rate patterns relative to purchasing-power-parity to find investment strategies that increase the real-dollar rate of return on investments in Mexico’s UDI mortgages.

Suggested Citation

  • Joseph B. Lipscomb & John T. Harvey & Harold Hunt, 2003. "Exchange-Rate Risk Mitigation with Price-Level-Adjusting Mortgages: The Case of the Mexican UDI," Journal of Real Estate Research, American Real Estate Society, vol. 25(1), pages 23-42.
    • Handle: RePEc:jre:issued:v:25:n:1:2003:p:23-42
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    Citations

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    Cited by:

    1. Isil Erol & Kanak Patel, 2007. "Pricing the Default Option of Inflation-Indexed Mortgages Using Explicit Finite Difference Method," International Real Estate Review, Global Social Science Institute, vol. 10(1), pages 48-92.
    2. Sanjay Sehgal & Mridul Upreti & Piyush Pandey & Aakriti Bhatia, 2015. "Real Estate Investment Selection and Empirical Analysis of Property Prices: Study of Select Residential Projects in Gurgaon, India," International Real Estate Review, Global Social Science Institute, vol. 18(4), pages 523-566.
    3. Fontenla, Matas & Gonzalez, Fidel, 2009. "Housing demand in Mexico," Journal of Housing Economics, Elsevier, vol. 18(1), pages 1-12, March.
    4. Bahmani-Oskooee, Mohsen & Wu, Tsung-Pao, 2018. "Housing prices and real effective exchange rates in 18 OECD countries: A bootstrap multivariate panel Granger causality," Economic Analysis and Policy, Elsevier, vol. 60(C), pages 119-126.
    5. Erol, Isil & Patel, Kanak, 2005. "Default risk of wage-indexed payment mortgage in Turkey," Journal of Housing Economics, Elsevier, vol. 14(3), pages 271-293, September.

    More about this item

    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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