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Welfare gains from market insurance: The case of Mexican oil price risk

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  • Ma, Chang
  • Valencia, Fabián

Abstract

Mexico has a long-standing practice of hedging 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.

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  • Ma, Chang & Valencia, Fabián, 2024. "Welfare gains from market insurance: The case of Mexican oil price risk," Journal of International Money and Finance, Elsevier, vol. 142(C).
    • Handle: RePEc:eee:jimfin:v:142:y:2024:i:c:s0261560624000159
    DOI: 10.1016/j.jimonfin.2024.103028
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    Cited by:

    1. Guenette,Justin Damien, 2020. "Price Controls : Good Intentions, Bad Outcomes," Policy Research Working Paper Series 9212, The World Bank.
    2. Antoine Levy & Mr. Luca A Ricci & Alejandro M. Werner, 2020. "The Sources of Fiscal Fluctuations," IMF Working Papers 2020/220, International Monetary Fund.

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    More about this item

    Keywords

    Hedging; Commodity exporters; Sovereign debt; Default;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
    • G1 - Financial Economics - - General Financial Markets

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