The hacienda hedge

TraDaToR said:
The mexican govt seems like a good trader.

https://www.bloomberg.com/news/feat...et-history-of-wall-street-s-largest-oil-trade
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Good return, very good return indeed!




When “the men from Hacienda,” as they’re known, headed back to their desks, their mission was to lock in, or hedge, Mexico’s oil revenue through a deal with Wall Street banks. Within minutes they began firing off messages to the oil trading desks of Barclays, Goldman Sachs, Morgan Stanley, and Deutsche Bank. Their instructions were to buy “put” options, contracts giving them the right to sell oil at a predetermined future price, at levels ranging from $66.50 to $87 a barrel. The banks receiving the orders had never seen an oil deal this big. The price tag for the options was $1.5 billion.

From Houston to New York to London, bankers worked against the clock to close the gigantic transaction. It amounted to 330 million barrels, enough to meet the annual oil imports of the Netherlands. Barclays, which was then muscling into the commodity big leagues, did the bulk of the buying with 220 million barrels. Goldman followed, at 85 million barrels.

Betting that oil prices were about to crash was an audacious wager, one made all the more remarkable by the individuals behind the deal—civil servants with unassuming titles such as “director general of fiscal planning.” In the lucrative oil business, a profession known for its generous compensation, these government employees were probably the worst-paid stiffs around. Yet the men from Hacienda—so called still, even though women are sometimes in the room—proved prescient in predicting a crash.

“It’s the deal that all banks wait for each year. It’s so large that it can make or break their year”

Everybody knew the world was tipping into a financial crisis at the time, but because of its excellent banking and political connections in the U.S., Mexico may well have had special insight into just how bad things would get. What’s more, as one of the world’s top oil exporters, the country generally has better information than, say, hedge funds, about where the market is heading. In 2008, that information led those in the room to believe global supply was well in excess of global demand.

Sure enough, as the banks executed the deal over a five-month period, oil prices tipped into free fall amid the worst financial catastrophe since the Great Depression. In 2009 oil prices would average less than $55, well below the average price of the options of $70.

The key to success behind this huge sovereign oil hedge was moving “quickly, very quickly,” says Gerardo Rodriguez. Undersecretary of finance and public credit at the time, he was one of those in the room; he’s now a managing director at BlackRock Inc. “At the start of the summer we saw that the financial crisis was spreading fast,” he says. “Despite that, oil prices were still high. They were even climbing. We told ourselves, ‘We need insurance, and we need to take advantage of $150 oil prices.’ ”

In December 2009 the four investment banks involved in the deal wired the proceeds of the wager back to Mexico. Official records tracking the money that landed in Account No. 420127 at state-owned Nacional Financiera bank show the tidy sum Mexico made: $5,084,873,500.

... ...


The experience scarred a generation of government officials, who decided they could never leave themselves so exposed again. Thus began the modern Mexican hedge, which came into existence in the early 2000s after legislators passed a law allowing sufficient budgetary flexibility to accommodate the deals. In 2001, Mexico made a tentative showing, spending just $217.3 million on put options, a fraction of the approximately $1 billion a year it would spend later. In 2003 and 2004, with oil prices rising, the country opted not to hedge at all. (The Mexican government declined to comment for this story.)

... ...

In most recent annual hedges, Mexico has used from four to six counterparties. Current and former bankers involved in the deal say the lenders’ profits were $30 million to $80 million a year per bank. “The Mexican hedge is an extremely important part of the oil business of the banks,” says George Kuznetsov, head of research at Coalition Development Ltd., an analytics company that tracks investment houses. Nonetheless, while Mexico has spent an average of $1 billion a year hedging over the past decade, the banks’ slices of that rich pie have gotten smaller, as more and more lenders have entered the mix.

... ...

Oil hedges aren’t uncommon. Airlines do them to insure against rising prices; U.S. shale producers rely on them to lock in revenue. But no deal comes close to matching Mexico’s annual “Hacienda hedge.” “Mexico is the biggest annual oil deal,” says Goran Trapp, founder of boutique advisory firm Energex Partners and former global head of oil trading at Morgan Stanley. Over the last 10 years, the notional value of the hedge has added up to $163 billion. “It’s the deal that all banks wait for each year,” says Richard Fullarton, founder of commodity fund Matilda Capital Management and a former senior trader at Royal Dutch Shell and Glencore. “It’s so large that it can make or break their year.”
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OddTrader said:
Good return, very good return indeed!
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it also begs the question, if these guys are 'recommending' bullish energy bets to majority of the street while a large whale is buying tons of put options with price target sub-$38 on crude by end of this year, should we assume there are similar things going on w/ other assets etc?

because it def looks like there's a whole hidden hierarchy, in terms of who gets the actual, alpha-generating idea execution, and who gets to hold the bag under guise of buying into a good investment!
 
There is nothing surprising that an oil producer is hedging against future price movements. That is why futures were invested in the first place. Anybody remembers SouthWest?:

"It loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not.
Southwest owns long-term contracts to buy most of its fuel at the equivalent of $51-a-barrel oil through 2009. The value of those hedges soared as oil raced above the $90-a-barrel mark and they are now worth more than $2 billion. "

http://www.nytimes.com/2007/11/28/business/worldbusiness/28iht-hedge.4.8517580.html

That was back in 2007. That is when a separate industry becomes an oiltrader and actually makes way more profits as from its original business...

What I don't get is if price was 100+ or even 120+, why did the Mexicans buy an average of 70 puts? That is quite a bit of drop, and it wasn't guaranteed. They could have bought the 100 puts and it is a no loss trade, if it goes down, the price is locked in, if it stays high, since they are the producers, they are still making shitloads...

Had price only dropped to 75ish, they lose on the puts AND on the price of oil...
 
TraDaToR said:
The mexican govt seems like a good trader.

https://www.bloomberg.com/news/feat...et-history-of-wall-street-s-largest-oil-trade
More...

From 2001-2017 they've earned $2.4B. They made $5.1 in 2009, $6.4 in 2015, and $2.7 in 2016. That means they basically lost $.9B in each of the other years. Oil crashed in 2008, 2014, and 2015.

Looks to me like they systematically buy ~$1B of puts each year, and in the past that's worked out to very low delta options (~50% of spot price). They probably "make" multiples of that $1B spend given it lowers their interest rate by 30bps...they probably get the cheapest hedge they can get away with.

It's not to discount their earnings. They've made about $2.4B more than me trading oil but this strikes me as a straightforward systematic hedge. Which makes sense, since they're in the business of hedging against a crash and not trading oil.
 
pinetboltz said:
it also begs the question, if these guys are 'recommending' bullish energy bets to majority of the street while a large whale is buying tons of put options with price target sub-$38 on crude by end of this year, should we assume there are similar things going on w/ other assets etc?
More...

Probably not. Depends, imo.

because it def looks like there's a whole hidden hierarchy, in terms of who gets the actual, alpha-generating idea execution, and who gets to hold the bag under guise of buying into a good investment!
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Very very complex. Google some good scholarly papers/theses.
 
"its hedges raked in $14.1 billion in gains and paid out $11.7 billion in fees to banks and brokers."

OK, now we know who the real profitmaker is. Also, we can stop complaining about brokers' fees....

If Mexico made huge on puts, someone also had to honor those puts and lose big. Apparently it wasn't the banks. Maybe the banks convinced some HFs to sell those puts...
 
Soon2Bgreat said:
From 2001-2017 they've earned $2.4B. They made $5.1 in 2009, $6.4 in 2015, and $2.7 in 2016. That means they basically lost $.9B in each of the other years.
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When you are the producer, buying puts is called insurance, aka cost of business. They didn't really lose in those years, because oil price stayed high, thus their profits from oil stayed high too.
 
Pekelo said:
There is nothing surprising that an oil producer is hedging against future price movements. That is why futures were invested in the first place. Anybody remembers SouthWest?:

"It loaded up years ago on hedges against higher fuel prices. And with oil trading above $90 a barrel, most of the rest of the airline industry is facing a huge run-up in costs, and Southwest is not.
Southwest owns long-term contracts to buy most of its fuel at the equivalent of $51-a-barrel oil through 2009. The value of those hedges soared as oil raced above the $90-a-barrel mark and they are now worth more than $2 billion. "

http://www.nytimes.com/2007/11/28/business/worldbusiness/28iht-hedge.4.8517580.html

That was back in 2007. That is when a separate industry becomes an oiltrader and actually makes way more profits as from its original business...

What I don't get is if price was 100+ or even 120+, why did the Mexicans buy an average of 70 puts? That is quite a bit of drop, and it wasn't guaranteed. They could have bought the 100 puts and it is a no loss trade, if it goes down, the price is locked in, if it stays high, since they are the producers, they are still making shitloads...

Had price only dropped to 75ish, they lose on the puts AND on the price of oil...
More...

Good points. As mentioned another post, very complex supply chain in trading crude oil.

Some hedges lost money, while at the same period some gained. Hedging involves not only timing and directional bets, but also hedge size/ratio. Just 10 cents.
 
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