During 2022 the relationship between the Mexican peso and the U.S. dollar had been reasonably stable, typically in a range between MXN 19 and MXN 20 per dollar. After that the peso steadily strengthened, and in March 2024 the rate of exchange was below MXN 17 per dollar.

As can be seen from the chart, this development in the FX market has had an impact on Mexican corn importers. Whilst corn prices in the U.S. have been falling towards the end of the period, in terms of Mexican pesos, the price for imports has fallen even faster.

This highlights the uncertainty that FX market prices can have for importers. Favorable movements in FX rates may well be followed by less favorable ones and vice versa. For importers of corn into Mexico, a reversal of the recent trend could create an adverse impact for importers.

CME Group offers futures and options contracts on the Mexican peso, which can be used to manage this FX exposure. These contracts are physically delivered at maturity, meaning that if held all the way to maturity, US dollars are exchanged for Mexican pesos to fulfil the contractual obligation. Each futures contract is in the amount of MXN 500,000. Using prices in March 2024, this equates to a contact value of around US$29,700, which can be compared to the dollar value of a Corn futures contract at the same time of around US$22,000.

Below are examples to show how the Mexican Peso futures and options contracts at CME Group can be used to hedge the FX component of Mexican corn import transaction.

In early May, a Mexican corn importer has an order to buy 1,500 metric tons of U.S. corn to be delivered in one month’s time.  The agreed terms are for payment in U.S. dollars at a rate equal to the Corn July futures price on the delivery day, plus five cents per bushel.

For the importer, this creates a one-month period of uncertainty regarding the cost that will actually be paid for the corn. This has two components: the price of corn and USD/MXN foreign exchange rate. Both these components of the risk can be hedged with futures.

The exposure to the CBOT Corn price can be hedged with CBOT Corn futures.  With each futures contract representing 5,000 bushels of corn, buying 12 futures for the July delivery will effectively hedge this position with respect to the price of corn.   This futures position can be closed out on the day the trading company takes delivery of the order.

The current price of the CBOT Corn futures July contract is 440 cents per bushel. Buying futures at this price will hedge the exposure to corn price fluctuations. With a price of 440 cents per bushel established through the use of the Corn futures hedge, the trading company can be confident the cost of the imports will be 445 cents per bushel, i.e., including the agreed price premium.

The FX component of the transaction can be hedged using the CME Group Mexican Peso futures contract. To determine the hedge transaction required, the trading company needs to determine whether to buy or sell futures, and the quantity to be transacted.

The CME Group Mexican Peso futures contract has a contract size of MXN 500,000, and prices are quoted in terms of the number of U.S. dollars per peso. Buying a CME Group Mexican Peso futures contract is equivalent to buying Mexican pesos in exchange for U.S. dollars. Selling the contract is equivalent to selling Mexican pesos in exchange for U.S. dollars.

To purchase the corn, the Mexican trading company will wish to convert pesos into U.S. dollars in order to make the payment, and therefore, will be buying U.S. dollars and selling Mexican pesos. This requirement can be hedged by selling Mexican Peso futures contracts. These futures should be sold to implement the hedge and subsequently purchased to close out the position once the FX hedge is no longer required. The expiration of the Mexican Peso futures contract occurs in the middle of the named expiry month. For example, the June futures contract expires in mid-June. This would make it the appropriate futures contract month hedge for this transaction, which has an intended completion date in early June.

The number of FX futures needed to hedge the transaction can be calculated by considering the currency exposure. With the corn futures hedge, the trading company will expect to pay US$186,015 to purchase the corn.

The futures price, quoted in U.S. dollars per Mexican peso, is US$0.05850, which is the equivalent of MXN 17.0940 per U.S. dollar. At this exchange rate, the purchase cost will be MXN 4,491,990. The contract size of the Mexican Peso futures contract is MXN 500,000, therefore to hedge the FX exposure, the trading company needs to sell nine futures.

We can examine what might happen to this hedged position in different outcomes.  To focus on the FX component, let’s assume that the corn price is unchanged over the one-month period.

An increase in the value of the Mexican peso can also viewed as a decrease in the value of the U.S. dollar, measured in Mexican pesos. In this example, we assume an increase in value from US$0.0585 to US$0.0605 per Mexican peso. This can also be seen as a change in value from MXN 17.0940 per US dollar to MXN 16.5289 per U.S. dollar.

With the corn price stable at 440 cents per bushel, the purchase cost in U.S. dollars is US$262,781, and the return from the corn futures hedge is US$0. In local currency terms, the purchase cost is MXN 4,343,494, which is lower than anticipated had the exchange rate not changed. This lower cost to the importer is offset by a loss made on the FX futures position. Overall, the cashflow has been maintained in line with expectations, which is the purpose of the futures hedging strategy.

A decrease in the value of the Mexican peso can also viewed as an increase in the value of the U.S. dollar, measured in Mexican pesos. In this example, we assume a decrease in value from US$0.0585 to US$0.0565 per Mexican peso. This can also be seen as a change in value from MXN 17.0940 per U.S. dollar to MXN 17.6991 per U.S. dollar.

Again, with the corn price stable at 440 cents per bushel, the purchase cost in U.S. dollars is US$262,781, and again the return from the corn futures hedge is US$0. However, in local currency terms, the purchase cost is MXN 4,650,998, which is higher than anticipated had the exchange rate not changed. To compensate, the FX futures hedge position records a gain of US$9,000, which equates to a gain of MXN 159,292.

We can also review the use of options to hedge the FX exposure. Buying options can enable the user to hedge against an adverse move in the market but continue to benefit from a favorable move. This preferential exposure comes at a cost, which is the premium that is paid to buy the option.

An option on an FX futures contract gives the buyer the right to buy (when it is a call option) or the right to sell (when it is a put option) an FX futures contract at predetermined price. This predetermined price is known as the strike price. Multiple options positions can be combined to create tailored option strategy positions, which can provide a high degree of flexibility to the user, but for the purposes of this analysis, we will look at a straightforward example.

Let’s assume that the exposure to the corn price is managed in the same way, i.e., by buying 12 corn futures contracts. The FX component can be hedged using options on the CME Mexican Peso futures contract.

The CME Mexican Peso futures contract has a contract size of MXN 500,000, and prices are quoted in terms of the number of U.S. dollars per peso. A call option is an option to buy futures, and therefore, buying a call option is equivalent to having the right to buy Mexican pesos in exchange for U.S. dollars at a fixed FX rate. Other things being equal, a call option will increase in value when the value of the Mexican peso increases.

A put option is an option to sell futures, and therefore buying a put option is equivalent to having the right to sell Mexican pesos in exchange for U.S. dollars at a fixed FX rate. Other things being equal, a put option will increase in value when the value of the Mexican peso decreases.

The Mexican trading company will wish to convert pesos into U.S. dollars in order to make the payment for the corn, and therefore, will be buying U.S. dollars and selling Mexican pesos. As can be seen in the futures hedging example, an increase in the value of the Mexican peso would reduce the purchase cost of the corn, measured in pesos, while a decrease in the value of the Mexican peso would increase the cost of the corn, measured in pesos.

The purchase of a put option would allow the trading company to offset the negative impact of a decrease in the value of the Mexican peso, while being able to benefit from an increase in the value of the peso.

For this example, the trading company buys put options which have a strike price equal to the current futures price of US$0.05850 per Mexican peso, equivalent to MXN 17.0940 per U.S. dollar. The number of options required to hedge the position is determined in a similar way to futures. Each option is an option on one CME Mexican Peso futures contract which has a contract size of MXN 500,000. The futures price, quoted in U.S. dollars per Mexican peso, is US$0.05850. At this exchange rate the purchase cost of US$ 262,781 will be MXN 4,491,990. To hedge against adverse movements in the FX exposure, the trading company needs to buy nine put options.

The put option has a premium, which is paid by the buyer at the time of the purchase. Prices for the option are quoted in terms of the number of U.S. dollars per peso. The price for the US$0.05850 put option on the June futures contract is US$0.00102. The total premium cost for the option is therefore U.S. $4,590.

This equates to MXN 77,183 at the prevailing spot FX rate.

It should be noted that the option on the June Mexican peso futures contract expires a few days before the underlying futures contract. For this example, with delivery of corn in early June, hedging with options on the June contract will be satisfactory.

We can again examine what might happen to this hedged position in different outcomes. To focus on the FX component, let’s again assume that the corn price is unchanged over the one-month period, and review the same movements in the FX rate as with the futures example, but also review the implication of no change in the FX futures price.

In this example, we assume the Mexican Peso futures price remains unchanged at U.S.$0.05850 per Mexican peso (MXN 17.0940 per U.S. dollar). With the corn price stable at 440 cents per bushel, the purchase cost in U.S. dollars is $262,781, and the return from the corn futures hedge is U.S.$0. In local currency terms, the purchase cost is still MXN 4,491,990. However, being very close to expiry, the put option giving the right to sell futures at U.S.$0.05850 has a low value of U.S.$0.00018. Whilst there is no change to the purchase value for the corn, the loss in the value of the option should be taken into account.

In this example, we assume an increase in value from US$0.0585 to US$0.0605 per Mexican peso (i.e. a decrease in the value of the U.S. dollar from MXN 17.0940 to MXN 16.5289). With the corn price stable at 440 cents per bushel, the purchase cost in U.S. dollars is $262,782, and the return from the corn futures hedge is US.$0. In local currency terms, the purchase cost is MXN 4,343,494, which is lower than anticipated had the exchange rate not changed. Being very close to expiry, the put option giving the right to sell futures at US$0.05850 is valued at US$0. The improved purchase value for the corn is therefore partially offset by a loss of premium value of the option.

With a greater increase in the value of the Mexican peso, the cost of the corn would decrease further, but this would not be offset by any further loss on the value of the put option.

In this example, we assume a decrease in value from US$0.0585 to US$0.0565 per Mexican peso (i.e. an increase in the value of the U.S. dollar from MXN 17.0940 to MXN 17.6991). With the corn price stable at 440 cents per bushel, the purchase cost in U.S. dollars is U.S.$262,781, and the return from the corn futures hedge is US$0. In local currency terms, the purchase cost is MXN 4,650,998, which is higher than anticipated had the exchange rate not changed. In this outcome, the put option giving the right to sell futures at US$0.05850 has a value of US$0.00200 per peso. The put option has increased in value, which partially offsets the increased cost of the corn.

With a greater decrease in the value of the Mexican peso, while the cost of the corn would increase further, this would be fully offset by a higher value for the put option.

Please look at the graph below for a clear illustration of the impact of an FX options hedge:

In uncertain times, hedging expected future revenues and expenditures can help to stabilize cash flow and create greater confidence in business performance.

For participants in international agricultural trade, CME Group’s suite of foreign exchange futures and options contracts complement the benchmark agricultural futures contracts and can provide for greater certainty and stability of cashflows and incomes.

Salient features of the futures contracts discussed in this article.

For more information or to discuss any of the themes detailed here, please contact your CME account representative or fxteam@cmegroup.com