Monday, November 24, 2008

Hedging: yer doin' it right!

Way to go, Mexican government. You have shown that you know how derivatives are supposed to be used and have used them very wisely to protect oil revenues in 2009:

"The world's sixth biggest oil producer hedged almost all of next's year oil exports at prices ranging from $70 to $100 at a cost of about $1.5bn (£961m) through derivatives contracts, according to bankers familiar with the deal."

Oil is trading right now in the low $50s so it seems like a wise move indeed. Even if prices rise above the contracted selling price in the puts, the loss is limited to the price of the options and $1.5 billion is not a bad price for a comprehensive insurance policy on such an important asset.

Maybe the Mexican Treasury department can give lessons to these guys.