FOW Awards: Most innovative or creative use of derivatives

Masterly use of options

Sure enough, between July and December last year, Texas crude fell from $145 to $38 a barrel. Mexican oil is a heavier and cheaper mix.

That crash could have knocked a terrible hole in the government’s revenue from taxes on Pemex, the state oil company. Fortunately, with approval from the president and minister of finance, the Treasury’s Oil Stabilisation Fund had deftly hedged 330m barrels of oil at $70 a barrel – the price on which the budget had been based.

That was lower than the market price in July to September when the hedge was hatched, but higher than it would end up trading between mid-October 2008 and early June 2009.

The hedge was executed privately with five or six counterparties, which the Treasury describes as the main players in the commodity markets. It covered nearly 1m barrels a day, out of the country’s exports of 1.3m to 1.5m a day.

The ultimate payout, to be determined at the end of November, is expected to be $6.5bn, from put options that cost $1.5bn.

“We’ve been comfortable with the strategy of insuring the budget just by purchasing these options,” says Gerardo Rodriguez Regordosa, director of public credit at the Mexican Ministry of Finance and Public Credit. “In the case that oil prices go higher then we still get the benefit of these higher prices.”

“We are not doing this on an opportunistic basis. It’s just part of the overall risk management strategy that allows us to sustain confidently the structure of the budget for this year,” Rodriguez says. “When you make responsible use of financial products that are consistent with the natural position of the underlying variable, then you always get a positive result.”

Mexico is considering hedging again for 2010. The budget was submitted to Congress in September, with an oil price forecast of $53.90 a barrel, and is expected to be approved by November 15.