Market Risk And Specific Risk In Mexico

Economic Conditions of Mexico

The Mexican economy is ranked as the 15^th biggest economies in the world in nominal aspects and listed as the 11^th biggest by PPP, under the International Monetary Fund. The economic freedom of Mexico is 64.8, positioning the economy at the 63^rd freest in the Index of 2018.  The entire score of index has improved by 1.2 points, making improvements in the free flow of trade, investment and fiscal health outpacing decrease in business liberty and government incorporation (Otero, 2018). The GDP in Mexico was valued at 1046.92B United States Dollar as on 2016. The worth of GDP shows a 1.69% of the global economy. Mexico’s GDP was averaged at 415.94B USD from 1960 till 2016, it was highest at 1298.46 USD Billion in 2014 and it was lowest at 13.06 USD Billion in 1960.

Mexico’s inflation rate is positioned at .55 percent in April as of 2018; it was 5.04% in March and under the expectation of market which was 4.59%. It was considered as the lowest rate of inflation at the time of December 2016, as there was reduction in prices for beverages, tobacco, food and other amenities (Damián, 2017). Mexico’s inflation rate was averaged at 25% from 2074 till 2018, it was highest at 179.73 percent in February of 1988 and it was lowest at 2.13 percent in December of 2015. 

Mexico’s Employment rate has improved to 97.06% from 96.79% as of 2018. Mexico’s Employment rate is averaged at 95.67% at the time of 2005 from 2018, place at the highest rate of 97.23% during December in 2015, and recorded as low with 93.58% during September in 2006 (Fernández and Meza, 2015).  

Mortgage or housing Loans in Mexican has been in recent years due to reduction in interest rates and increase in the length of the loans. Further it has annual growth of 4% (Mexico Real Estate Outlook, 2017).

Yield curve of Mexico has been reduced over the years but it is still comparatively higher than other countries. 

The economy of Mexico has attained wide consistency and improved resilience in the current tears, and the nation has made full advantage of slow growth. Considering the present conditions if Mexico, it is likely to at an initial contraction stage ion the economic cycle, which matches with the mid bear stage in the market cycle of stock (Leippold and Matthys, 2015). These stages can be classified by; Economic slowdown, A bearish stock market (SPY) (IWM) (QQQ) in which investors sells investment due to probably to reducing price, growth of GDP approx or under 2% and investors searching for secured stock inclusive of defensive stocks and stocks offered by the blue-chip companies. 

Yield Curve of Mexico

However, it is strongly associated to the deterioring economy of US, various factors inclusive of the modest exterior deficit in current account, facilitated by the higher prices of exporting oil, low debt ratio on external basis, FE reserves placed effectively, well managed financial regulations and the contribution of liquid as well as profitable banks in order to strengthen the position of Mexico.

The currency of Mexico is Mexican peso, it is expressed as $ with a code of MXN. It is valued with gold. Hence, when there is an increase in prices of gold, the Mexican peso will be likely to value against other main currencies. 

The credit rating by Standard and Poor for Mexico is stated as BBB+ having a consistent outlook. The credit ratings by Moody for Mexico is set as A3 having consistent outlook. The credit ratings by Fitch for Mexico are stated as BBB+ having a consistent outlook. The credit rating by DBRS’s for Mexico is reported as BBB relatively high with consistent outlook (Hill, Bissoondoyal-Bheenick and Faff, 2017). A credit rating is measured by autonomous wealth funds and other investor for the consideration of Mexico’s credit worthiness.

The government debt of Mexico is equal to 47.90% as on 2016, it is decreasing due to the inability of nation to stop reserve loss and insufficient cash.

The Gross Domestic Product in Mexico is valued at 1046.92 billion United States dollars as on 2016.The worth of GDP shows a 1.69% of the global economy (Rodríguez?Pose and Villarreal Peralta, 2015). The economy of Mexico has macroeconomic consistency, leading to low inflation and interest rates to draft low while increasing the per capita income.

The stock exchange of Mexico is BMW was formed out of the amalgamation of 3 stock exchanges operating in Mexico. The three key stock exchanges are The Bolsa de Valores de México, the Bolsa de Occidente and the Bolsa de Monterrey (Martinez and Tse, 2017). The products traded in the stock exchange of Mexico are FUTURES, CURRENCY, Mexican Peso/U.S. Dollar (DEUA), EURO and INDICES.

The Mexican Derivates Exchange is an exchange of futures as well as options in Mexico, situated in the Mexican Stock Exchange and works as a subsidiary of that similar group. It provides various products divided into Futures, Swaps and Options which are Mexican Local Stocks, Bond and IPC Index.

The SHCP is the major regulator of Mexico’s banking system, it is responsible for establishing and measuring economic policies of federal government for the public debt sectors, financial, income, fiscal and expenditure. 

Business Cycle Stage of Mexico

The CNBV is the second main regulator of Mexico and is responsible for oversighting and controlling banking bodies, and financial systems in Mexico.

The Mexican Banking Association states the bank interests of the banks of Mexico. Mexico has seven development banks owned by government that offer services to particular economic day (Benavides, 2016). These banks are Ban comer, Banamex, Santander, Banorte, HSBC, Inbursa, and Scotia Bank.

OTC derivatives market in Mexico has higher trading volume as compared to exchange trading; it has big scale in economy of Mexico. 

In the given scenario small corner store owner would take a term loan from the bank or financial institution. If a small corner wants to borrow a sum of $20000, then he will have to repay the amount in Equated Monthly Instalments (EMI’s) of $941/month for a period of 2 Years. The Interest Rate is assumed to be 12%.

CALCULATION OF DETAILS OF EMI
MONTHS	EMI	INTEREST	PRINCIPAL REPAYMENT	OST PRINCIPAL
0				20000
1	941	200	741	19259
2	941	193	749	18510
3	941	185	756	17753
4	941	178	764	16989
5	941	170	772	16218
6	941	162	779	15438
7	941	154	787	14651
8	941	147	795	13856
9	941	139	803	13054
10	941	131	811	12243
11	941	122	819	11424
12	941	114	827	10596
13	941	106	836	9761
14	941	98	844	8917
15	941	89	852	8065
16	941	81	861	7204
17	941	72	869	6334
18	941	63	878	5456
19	941	55	887	4569
20	941	46	896	3674
21	941	37	905	2769
22	941	28	914	1855
23	941	19	923	932
24	941	9	932	0

In the present case if a bank wants to borrow $8,000,000 for a period of 48 hours, then bank needs to issue commercial paper in favour of another bank and can borrow money. Assumed that interest rate is 6% then simple interest would be calculated as follows:

Simple Interest= (Principal*Rate of Interest*Time)/100

= $8,000,000*6*4/365)/100

= $8,000,000*6*4/365*100

= $192,000,000/36500

= $5260.27

If the government needs to fund budget deficit, then one of the methods is to issue government bonds to the public(Sousa, 2015). It will create the money for the government and will bridge the gap of the deficit.

If the engineer wants to invest $10000 and $500 monthly, then the best option available to him is to invest in Systematic Investment Plans where the funds are managed by experienced portfolio managers. The engineer will save in the span of 20 Years is $2945102 at an Annualized interest rate of 8%p.a.

In a situation where portfolio manager does not want to consider equities in their portfolio then in such case, they can consider following options:

Stock options mean retaining a stock option offers the appropriate, but not the restrictions to purchase and sell the amount of stock while putting options at a fixed price by the date of expiry.

Single stock futures refer to the agreement to cater, in most situations, 100 shares of a particular stock on a given date in near future(Patel, 2015). By fixing the interest rate in the contract price, the investor is able to realize the carrying cost on an earlier basis. 

Credit Rating, Government Debt, and Gross Domestic Product in Mexico

Stock warrants are referred as the rights to purchase at a given price unless a present date. It is same as the call options, wherein investors can practice stock warrants at a predetermined price.  

Both market risks, as well as specific risks, are two various kinds of risk that can create an impact on assets. Further, the investment assets can be classified into two categories which are a systematic risk and unsystematic risk. Systematic risks can affect a wide scale of assets; it is an inborn risk present in the stock market. The applicability of this risk is in all sector, however, this can be managed and controlled.  In a situation where there is a situation which can affect the overall stock market, a stable response within the flow is referred as systematic risk. For example, if Mexican government is providing 7% yield as compared to the stock market which is providing minimum 10% of return(Bromiley and et al., 2015).  The additional burden of tax 1% is declared by Mexican government on the sudden basis on the transactions of the stock market, and then there will be the impact of systematic risk to all the stocks while making the Mexican bonds appealing.

On the other hand, the unsystematic risks merely impact a sector or a specified corporate. It is an industry or organization based risk in every type of investment. These types of risk are emerged in the market but are unpredictable and can take place at any stage resulting in extended disruption(Jagric and et al., 2015). For example, if the aviation industry staff of Mexican airline is under indistinct strike, then it can result in high risks to the airline industry shares, thereby reducing the prices of stock while affecting the industry as a whole. 

References

Aalbers, M.B., 2016. The financialization of home and the mortgage market crisis. In The Financialization of Housing(pp. 40-63). Routledge.

Benavides, G., 2016. Exchange Rate Risk Premium: An Analysis of its Determinants for the Mexican Peso-USD. Revista mexicana de economía y finanzas, 11(1), pp.55-77

Bromiley, P., McShane, M., Nair, A. and Rustambekov, E., 2015. Enterprise risk management: Review, critique, and research directions. Long range planning, 48(4), pp.265-276.

Damián, A., 2017. Adjustment, poverty and employment in Mexico. Routledge.

Fernández, A. and Meza, F., 2015. Informal employment and business cycles in emerging economies: The case of Mexico. Review of Economic Dynamics, 18(2), pp.381-405.

Hill, P., Bissoondoyal-Bheenick, E. and Faff, R., 2017. New evidence on sovereign to corporate credit rating spill-overs. International Review of Financial Analysis.

Leippold, M. and Matthys, F., 2015. Economic policy uncertainty and the yield curve.

Martinez, V. and Tse, Y., 2017. Intraday price discovery analysis in the foreign exchange market of an emerging economy: Mexico. Research in International Business and Finance.

Mexico – Economic Indicators. 2018. [Online]. Available through < https://tradingeconomics.com/mexico/indicators>. [Accessed on 9^th May 2018].

Mexico Employment Rate. 2018. [Online]. Available through < https://tradingeconomics.com/mexico/employment-rate>. [Accessed on 9^th May 2018].

Mexico real estate outlook. 2017. [Online]. Available through < https://www.bbvaresearch.com/wp-content/uploads/2017/07/1707_MexicoRealEstate_1H17.pdf>. [Accessed on 9^th May 2018].

Otero, G., 2018. Neoliberal reform and politics in Mexico: An overview. In Neoliberalism Revisited (pp. 1-25). Routledge.

Rodríguez?Pose, A. and Villarreal Peralta, E.M., 2015. Innovation and regional growth in Mexico: 2000–2010. Growth and Change, 46(2), pp.172-195.

Sherman, H.J., 2014. The business cycle: growth and crisis under capitalism. Princeton University Press.

Sousa, R.M., 2015. Linking wealth and labour income with stock returns and government bond yields. The European Journal of Finance, 21(10-11), pp.806-825.