Mexico's Oil Price–Hedging Programme
Sovereign fiscal insurance since the 1990s · Executed by Banco de México
Oil share of federal revenue
>30%
Peak MTM value (2009)
~$10B
Option type used
Asian term put
The Problem
Oil revenues fund over 30% of Mexico's federal budget. A sharp price drop threatens public spending, destabilises markets, and can force emergency austerity.
The Solution
Each year, Mexico buys Asian term put options on Maya crude, locking in a floor price consistent with the federal budget. If prices crash, the options pay out.
Why it worked in 2009
WTI collapsed from $140 to $40. Mexico's hedges generated nearly $10bn in mark-to-market value, publicly disclosed to anchor investor confidence.
The FEIP fund
The Oil Income Stabilisation Fund (FEIP) holds hedge premiums and profits. But its limited size ($1–6bn) means it can't absorb big shocks alone — the hedge programme fills the gap.
FEIP Fund Balance (illustrative, $bn)
The Derivatives Toolkit
How instruments evolved — and why Asian term puts won
Option payoff diagram — put option
Net P&L with hedge
Unhedged oil revenue
Strike price
Option cost comparison — WTI $87.50 strike (Dec 2011)
| Option type | Premium ($/bbl) | Payoff mechanic | Cashflows |
|---|
| ★ Preferred Asian term settled | $4.18 | Avg price vs strike over 12 months | 1 |
| European term settled | $5.21 | Spot price vs strike at expiry | 1 |
| Asian monthly (strip) | $5.61 | Avg per calendar month vs strike | 12 |
| European monthly settled | $8.31 | Monthly spot vs strike at expiry | 12 |
Why Asian options beat European in 2009
Oil prices crashed from $140 to $30 mid-year, then recovered to above strike by December. A European option (checks price only at expiry) would have expired worthless — zero payout. The Asian option (checks average price across all 252 trading days) would have settled in-the-money, fully compensating for the months of low prices, regardless of the recovery.
Underlying: Maya crude
80%+ of Mexico's production. No screen market — priced by PMI as: 0.40×(WTX Sour + Fuel Oil) + 0.10×(LLS + Brent) + K. Eliminates basis risk vs WTI/Brent proxies.
Strike price logic
Set OTM at delta 10–25%, calibrated to the federal budget oil reference price. Balances protection against catastrophic downside with manageable premium cost.
Historical Performance
Programme years and estimated outcomes — the 2009 vintage is the landmark
2001
Post 9/11 demand shock
$16
$17
OTM
2002
Iraq war premium, stable
$17
$21
OTM
2005
Katrina supply disruption
$27
$42
OTM
2006
Rising commodity super-cycle
$35
$53
OTM
2008
Pre-crisis WTI peaks at $140
$49
$85
OTM
2009
★ Financial crisis — landmark year
$70
$57
ITM ~$5B
2010
Recovery year, prices rebound
$59
$72
OTM
2011
Arab Spring supply premium
$65
$99
OTM