The Mexican Treasury has just announced new BONDES F. BONDES are popular and highly liquid floating rate notes in the Mexican market. More than 95 billion USD equivalent are currently outstanding, representing 22% of the Mexican peso denominated sovereign debt. The first auction is expected to take place in October. Coupons on these new bonds will be a direct function of the FTIIE rate and can be hedged using CME FTIIE futures as demonstrated in this paper.
Final coupon calculations will be made by assigning overnight FTIIE rates to each day in the coupon period, including weekends and holidays, and then compounding such rates daily to calculate an annualized rate for the coupon period. The rate is then applied over the 4weeks or 28day period to generate a coupon cash flow. Rates assigned to weekends and holidays are based on the prior published daily rate.
This method of coupon calculation is mirrored in the CME FTIIE contracts (See whitepaper on settlement calculation). The similarities of both the index and the compounding calculation make CME FTIIE futures ideal instruments to hedge future BONDES F cash flows or to price the value of outstanding bonds.
This paper examines how CME FTIIE futures can be used to effectively hedge changing overnight FTIIE rates and to lock in the value of BONDES coupons, as implied by the purchase price.
In order to determine the correct number of FTIIE contracts required to hedge a BONDES position, we first need to calculate hedge ratios. In order to do that, we consider the concept of equivalent notional.
FTIIE contracts are defined by the value of the IMM index at 20,000 MXN per 1%. This is often expressed in terms of basis points (1/100 of 1%) and is also known as the basispoint value or tick value. For FTIIE contracts this value is 200 MXN (20,000/100).
Since we now know from this contract specification that for a 1bp move in rates, the value of an FTIIE contracts changes by 200 MXN, we can calculate the equivalent notional of an OTC contract that would change in value by the same amount and covering the same period.
We need to solve the following equation:
Notional x 0.01% x (no. of days in period / 360) = 200 MXN
Recalling that 0.01% = 1/10,000; we can rearrange the above to:
Notional = 200 x 10,000 x 360 / no. of days in month; or:
Notional (in millions) = 720 / no. of days in month
The following table details the equivalent notional of one contract for months of varying lengths:
Exhibit 1
Month 
Days in month 
Notional equivalent (Millions MXN) 

January 
31 
23.23 
February 
28 
25.71 
March 
31 
23.23 
April 
30 
24.00 
May 
31 
23.23 
June 
30 
24.00 
July 
31 
23.23 
August 
31 
23.23 
September 
30 
24.00 
October 
31 
23.23 
November 
30 
24.00 
December 
31 
23.23 
Using the information in the above table, we can calculate the required number of futures to hedge a position in BONDES F. Let’s work through an example:
Imagine we are at the beginning of 2021 and own a hypothetical BONDES F security with six months left to maturity.
At the time of purchase of the BONDES F the forward interest rate curve is almost constant at close to 4.25% as shown by the dark blue line below in exhibit 2.
Exhibit 2
If the expectations for interest rates decrease, the value of coupons of our BONDES F position would also fall, if interest rates expectations were to rise then the BONDES F would similarly become more valuable.
The lighter blue line represents a scenario where expectations for interest rates do fall and in fact these new expectations are realised by daily funding rates. In this situation our BONDES F value would be lower than previously. We can hedge this with FTIIE futures.
As interest rates fall the value of FTIIE future rises and vice versa. Hence in our scenario we need to buy FTIIE futures to protect against losses on the BONDES F position in the case where interest rate expectations fall.
The notional of our position in BONDES F is 1bn MXN pesos. In order to hedge we would need to buy futures contracts in each of the next six months until the BONDES maturity date. The number of each contract required can be calculated by taking MXN 1,000 mio and dividing by the notional equivalent for each month per the table in exhibit 1 above. Hence, we get the calculation below:
Exhibit 3
Month 
Days in Month 
Futures contract Notional Equivalent (Millions MXN) 
# of contracts to hedge 1bn MXN Bondes F 
Futures price at 02Jan2021 

January 
31 
23.23 
43.00 
95.75 
February 
28 
25.71 
39.00 
95.74 
March 
31 
23.23 
43.00 
95.74 
April 
30 
24.00 
42.00 
95.74 
May 
31 
23.23 
43.00 
95.74 
June 
30 
24.00 
42.00 
95.74 
The expected coupon interest as at 02Jan2021 on the hypothetical MXN 1bn notional of BONDES F can be seen in this table:
Exhibit 4
Coupon Date 
Days remaining in Coupon 
Coupon implied by daily rates % 
Coupon Interest (MXN Peso) 

31Dec20 

14Jan21 
14 
4.25 
1,651,126 
11Feb21 
28 
4.25 
3,307,861 
11Mar21 
28 
4.26 
3,313,672 
08Apr21 
28 
4.26 
3,313,170 
06May21 
28 
4.26 
3,313,170 
03Jun21 
28 
4.26 
3,313,170 
01Jul21 
28 
4.26 
3,313,170 
Total Coupon Interest 
21,525,338 
If the revised market expectations are borne out, the coupon interest that would be earned (as depicted by the lighter blue line in the yield curve chart above) would be lower, as demonstrated in this table:
Exhibit 5
Coupon date 
Days remaining in coupon 
Coupon implied by daily rates % 
Coupon interest (MXN peso) 

31Dec20 

14Jan21 
14 
4.24 
1,650,152 
11Feb21 
28 
4.18 
3,254,373 
11Mar21 
28 
4.04 
3,145,121 
08Apr21 
28 
4.03 
3,132,290 
06May21 
28 
4.01 
3,122,748 
03Jun21 
28 
4.01 
3,116,339 
01Jul21 
28 
4.02 
3,123,583 
Total coupon interest 
20,544,606 
We see that the total amount of coupon interest earned would be lower by 980,732 MXN in the revised market scenario versus the hypothetical starting point.
Had we hedged the change in rates, we would have seen a profit on the FTIIE futures hedges similar in magnitude to the losses on expected interest.
When market rate expectations were at 4.25%, the prices of FTIIE futures would have been those in the column below labelled “Purchase price.” Similarly, the price of futures implied by the revised market scenario depicted by the light blue line in exhibit 2 is calculated and displayed in the column labelled “Current Market price.”
Note that the quantity of futures that we would have hypothetically purchased is the same as in Exhibit 3 above and is calculated from the notional amount of the BONDES F holding. Let’s see that shown again in a table:
Exhibit 6
Month 
# of contracts 
Purchase Price 
Current Market Price 
Price Change since purchase (bp) 
Profit 

January 
43 
95.75 
95.75 
0 
 
February 
39 
95.74 
95.94 
20 
156,000 
March 
43 
95.74 
95.97 
23 
197,800 
April 
42 
95.74 
95.98 
24 
201,600 
May 
43 
95.74 
95.99 
25 
215,000 
June 
42 
95.74 
95.98 
24 
201,600 
252 


Futures Profit 
972,000 
Readers will note that the futures profits are very close to the loss of interest income on the BONDES F, which was due to the shift in interest rate expectations. Thus, we have executed an effective hedge.
CME Group’s MXN FTIIE rate futures are an excellent hedge for the interest rate risk variability of BONDES F coupons. They allow users to effectively hedge changing overnight FTIIE rates and to lock in the value of BONDES coupons, as well as potentially speculating on any potential changes in value.
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