STRATEGY FOR HEDGING ACCOUNTS RECEIVABLE WITH FUTURES
If a Mexican company has an account receivable in foreign currency (e.g., U.S. dollars) that will be paid in the future, it can hedge the exchange risk (the appreciation of the Mexican peso against the U.S. dollar) as follows:
I: With a long hedge: Taking up a long position in futures contracts on the Mexican peso, on the CME.
$ .1538 Price
II. With a short hedge: Taking up a short position in futures contracts on the U.S. dollar on MexDer.
If the peso firms against the dollar, the company will collect less pesos for each dollar owed it, but it will also gain the difference in its future contract positions.
N$ 6.5 N$ 6.6
Another key participant in the derivatives markets is the speculator. The following shows an example of a Mexican investor who wants to speculate between the dollar and the peso using futures contracts on MexDer.
Let us assume a speculator in Mexico thinks that the general index of the Mexican Stock Exchange—the Price and Quotations Index (IPC)--will rise in the next two months, and is therefore ready to take up a position as an investment. One alternative would be to buy all of the stocks that make up the IPC and sell them later. If the price of the stocks rises over the next two months, the speculator can make a profit by selling them, but if the price drops, the result would be a loss. Another possibility would be to establish a long position in futures contracts on the IPC, on MexDer.
What is the difference between the two alternatives? To buy all the shares that make up the IPC, the speculator would have to pay the total price of all those shares; buying and IPC future on MexDer would only require the payment of a small proportion—about 5% of the cost of the shares. In effect, the futures market allows speculators to benefit from a leverage effect. With a relatively small initial outlay, the speculator can take up a sizeable position.