The Currency of Mexico Was the Mexican Peso

8/8/2019 The Currency of Mexico Was the Mexican Peso

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Contents

UNDERSTANDING THE MEXICAN PESO AND ITS MARKET STRUCTURE ........................... 2

MAJOR DEVALUATIONS OF MEXICAN PESO ................................ ................................ ........... 4

MEXICAN DERIVATIVES EXCHANGE ................................ ................................ ........................ 5

TESTING RPPP and IRP: ................................ ................................ ................................ .................. 6

Method Used: ................................ ................................ ................................ ............................ 6

Data Used: ................................ ................................ ................................ ................................ . 6

Exchange Rate (annual average): ................................ ................................ ................................ ... 6

Inflation Rate: ................................ ................................ ................................ ................................ 7

Exchange rate movement as per RPPP: ................................ ................................ .......................... 7

Interest Rate: ................................ ................................ ................................ ................................ . 9

Exchange rate movement as per IRP: ................................ ................................ ............................. 9

COMPARING EXCHANGES RATE OPTAINED: ................................ ................................ ..... 11


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UNDERSTANDING THE MEXICAN PESO AND ITS MARKET

STRUCTURE

The currency of Mexico was the Mexican Peso (Mex$). The Banco de Mexico (Bank of Mexico, BOM) together with the Secretariat of Finance and Public Credit (SHCP)

administered all currency matters, including the exchange control system. The intervention

currency was U.S. Dollar. There were no taxes or subsidies on purchases or sales of foreign

exchange, and banks were freely engaged in exchange transactions between the peso and any

other currency.

From 1954, the Official Rate of Mexican Peso was set at $12.50 per U.S. Dollar. Mexico

maintained a fixed peso-dollar exchange rate even after the collapse of the Bretton Woodssystem in 1971 and the world oil price shock in 1973. However, the distortions caused by

import substitution policies, the public expenditure-led growth financed mainly by borrowing

from the BOM, the accumulation of foreign debt, high inflation, the overvaluation of the

peso, and a large capital flight led finally to the devaluation of the peso in 1976. This

basically ended the regime of fixed exchange rates. The Peso switched to the managed

floating exchange rates in 1976, which gave more flexibility for discretionary economic

policy. The exchange rates were determined largely on the basis of demand and supply

conditions in the exchange markets. However, the authorities intervened when necessary tomaintain orderly conditions in the exchange market.

In August 1982, the Effective Rate was abolished. There were two exchange markets (the

controlled market and the free market), with 2 Preferential Rate and Free Market Rate. The

exchange rate in the controlled market was adjusted daily, based on the differential between

the rates of inflation expected in Mexico and its main trading partners and other indicators. A

week later, MexDollar rate was also introduced to form three-tier exchange market. However,

this rate was abolished in September. In the same month, the Free Market Rate was changed

to Ordinary Rate.


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At the end of 1982, the Ordinary Rate converted to Free Market Rate again and a Special

Rate was introduced. However, the Special Rate was abolished in March 1983. In July 1985,

a Super Free Market Rate replaced the Official Free Market Rate and the nationalized

commercial banks were allowed to deal the transactions closer to black market rate.

In the following years, the exchange rate of Mexican Peso depreciated continuously. At the

end of 1991, the Controlled Rate and Super Free Market Rate were unified into Official Rate

while the Controlled Exchange Market was eliminated. Started from the end of 1994, a

floating rate policy was maintained by the government, with BOM intervening in the foreign

exchange market under exceptional circumstances to minimize volatility and ensure an

orderly market.


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MAJOR DEVALUATIONS OF MEXICAN PESO

1. On 15 th august 1971, Following the floating of the U.S. Dollar, the Peso maintained

its links to the American unit, thus effecting devaluation.

2. 31 August 1976, The Peso was devaluated, as the unit was placed on a controlled,

floating basis creating an Effective Rate as well as a Free Market Rate at the exchange

houses.

3. On 18 th Febrauary 1982 The Peso was left to float freely in exchange markets before

the Central Bank intervention was resumed on June 5th with a controlled float.

4. On 3 rd November 1982, The Peso was again devalued via the creation of a floating

Official Free Market Rate applicable within a special free zone along the United

States border.

In 1994, government fixed rate band increase to 15 percent (up to 4 pesos per US dollar),

by stopping the previous administration's measures to keep it at the previous fixed level.

The government, being unable even to hold this line, decided to let it float.The peso

crashed under a floating regime from four pesos to the dollar to 7.2 to the dollar in the

space of a week. The United States intervened rapidly, first by buying pesos in the open

market, and then by granting assistance in the form of $50 billion in loan guarantees. The

dollar stabilized at the rate of 6 pesos per dollar. By 1996, the economy was growing

(peaked at 7% growth in 1999). In 1997, Mexico repaid, ahead of schedule, all US

Treasury loans.


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MEXICAN DERIVATIVES EXCHANGE

The Mexican Derivatives Exchange (MexDer) is an options exchange in Mexico, located in

the same building as the Mexican Stock Exchange and a subsidiary of the same owning group

History

MexDer claims that its formation was first formally discussed in 1994. It actually began

operations December 15th, 1998.

In September 1999, the Board of Directors of MexDer approved a project to create an

electronic trading system. Before that time it had been operating as an open-outcry market.The new system, "SENTRA-DERIVADOS", was a clientserver system using a TCP/IP

network.

In March 2004, MexDer moved its electronic trading to the Spanish "S/MART" system.

Organization

MexDer has a typical corporate structure. It also authorizes special relationships with certain

kinds of entities:

y Brokersy Clearing Members, "trusts that participate as shareholders of MexDer and contribute to

Asigna's capital; their purpose is to settle and, when applicable, trade Futures and Options

contracts in MexDer on behalf of clients. ... Clearing Members have their own capital,

they specialize in the evaluation of counterpart risk, manage guarantees and, in order to

avoid conflicts of interest, they keep proprietary accounts completely separate from third-

party accounts."


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TESTING RPPP and IRP:

Method Used:

Trend analysis based on historical data.

Data Used:

Inflation rate (CPI) average annual (USA and Mexico)

Interest rate average annual (USA and Mexico)

Exchange rate direct quotes average annual(MXN/USD)

Exchange Rate (annual average):

MXN/USD Average

YEAR bid ask Average

2000 9.4532 9.4654 9.4593

2001 9.3289 9.3466 9.3378

2002 9.6490 9.6825 9.6658

2003 10.7763 10.8060 10.7911

2004 11.2671 11.3093 11.2882

2005 10.8803 10.9048 10.8926

2006 10.8916 10.9155 10.9035

2007 10.9187 10.9366 10.92772008 11.1333 11.1653 11.1493

2009 13.4849 13.5177 13.5013


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Inf l i n Rate:

E ange rate movement as per RPPP:

MEXICO USA

Yea r Infl atio n r ate (c o n um e r

pr ic es) (% )

Yea r Infl atio n r ate (c o n s um e r

pr ices) (% )2000 15 0 . 15 2000 3 . 38 0 . 03382001 9 0 . 09 2001 2 . 83 0 . 0283

2002 6 . 5 0 . 065 2002 1 . 59 0 . 0159

2003 6 .

0 . 064 2003 2 . 27 0 . 0227

2004 4 . 5 0 . 045 2004 2 . 68 0 . 0268

2005 5 . 4 0 . 054 2005 3 . 39 0 . 0339

2006 4 0 . 04 2006 3 . 24 0 . 0324

2007 3 . 4 0 . 034 2007 2 . 83 0 . 0283

2008 4 0 . 04 2008 3 . 85 0 . 0385

2009 5 . 1 0 . 051 2009 2 . 63 0 . 0263


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0.0000

2 .0000

4 .0000

6.0000

8.0000

10.0000

12 .0000

14 .0000

1 2 3 4 6 7 8 9 10

EXCHANGE RATE AS PER

RPPP (C)

ACTUAL EXCHANGERATE PESO/USD (A)


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Interest Rate:

Exchange rate movement as per IRP:

M xico SA

YearInterest rate

(%) YearInterest rate

(%)2000 16.94 0.1694 2000 6.03 0.0603

2001 13.79 0.1379 2001 5.02 0.0502

2002 8.54 0.0854 2002 4.61 0.0461

2003 7.37 0.0737 2003 4.02 0.0402

2004 7.74 0.0774 2004 4.27 0.0427

2005 9.28 0.0928 2005 4.29 0.0429

2006 7.51 0.0751 2006 4.79 0.0479

2007 7.6 0.076 2007 4.63 0.0463

2008 8.09 0.0809 2008 3.67 0.0367

2009 5.83 0.0583 2009 3.2 0.032

IRP

YEAR diff e e cialEXCHANGE

RATE

2000 0.1029 0.9990 9.4495

2001 0.0835 0.9992 9.3300

2002 0.0376 0.9996 9.6621

2003 0.0322 0.9997 10.7876

2004 0.0333 0.9997 11.2844

2005 0.0478 0.9995 10.88742006 0.0260 0.9997 10.9007

2007 0.0284 0.9997 10.9245

2008 0.0426 0.9996 11.1445

2009 0.0255 0.9997 13.4979


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1 0

0.00002.0000

4 .0000

6 .0000

8.0000

10.0000

12.0000

14 .0000

1 2 3 4 6 7 8 9 10

EXCHANGE RATEAS PER IRP (B)

ACT A EXCHANGE RATEPESO/ SD (A)


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COM PARING E CH ANG E RA TE O P T AIN E :

In t case of Mexc ian Peso bo t R PPP and I R P ho ld good. Th is cou ld be because bo th ho ld

good in the long run. The dura tion cons idered can be one of the fac tors beh ind this.As mos t

econom ist sugges t longer the dura tion more is the poss i b ilit of bo th of the par ities ho lding

good.

Year

ACTUALEXCHANG

E RATEPESO/USD

(A)

EXCHANGE

RATE AS PERIRP (B)

DIFF ERENCE(A-B)

EXCHANGE

RATE AS PERRPPP (C)

DIFF ERENCE(A-C)

2000 9 .

93 9 .

95 0 . 0097 9 .

0 . 0106

2001 9 . 3378 9 . 3300 0 . 0078 9 . 3322 0 . 0056

2002 9 . 6658 9 . 6621 0 . 0036 9 . 6611 0 . 0047

2003 10 . 7911 10 . 7876 0 . 0035 10 . 7868 0 . 0044

2004 11 . 2882 11 . 2844 0 . 0038 11 . 2862 0 . 0020

2005 10 . 8926 10 . 8874 0 . 0052 10 . 8904 0 . 0021

2006 10 . 9035 10 . 9007 0 . 0028 10 . 9027 0 . 0008

2007 10 . 9277 10 . 9245 0 . 0031 10 . 9270 0 . 0006

2008 11 . 1493 11 . 1445 0 . 0048 11 . 1491 0 . 0002

2009 13 . 5013 13 . 4979 0 . 0034 13 . 4981 0 . 0032

0.0000

5.0000

1 0.0000

1 5.0000

1 2 3 4 5 6 7 8 9 1 0

ACT

A

EXCHANGE RATEPESO/ SD (A)

EXCHANGE RATE AS PER IRP (B)

EXCHANGE RATE AS PER RPPP (C)

The Currency of Mexico Was the Mexican Peso

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