Finance and Investment Report: Analysis of Mexican Financial Markets

This report provides a comprehensive analysis of the Mexican economy and its financial markets. It begins with an overview of Mexico's economic conditions, including GDP, inflation, and employment rates, and explores the country's economic freedom and business cycle stage. The report then delves into the Mexican peso, credit ratings, government debt, and the stock exchange, including the products traded and the role of key regulators like SHCP and CNBV. Furthermore, the report includes practical financial scenarios, such as term loan calculations for a small business, commercial paper issuance for a bank, government bond issuance for funding budget deficits, and investment options for an engineer. It also discusses portfolio management strategies, including options for managers who do not want to consider equities, and differentiates between systematic and unsystematic risks. The report concludes with a list of relevant references.

Finance and Investment

TABLE OF CONTENTS
Part A...............................................................................................................................................4
Economic conditions of Mexico..................................................................................................4
Yield curve of Mexico.................................................................................................................5
Business cycle stage of Mexico...................................................................................................6
Part B...............................................................................................................................................6
Part C...............................................................................................................................................6
Part A...........................................................................................................................................6
Part B...........................................................................................................................................7
Part C...........................................................................................................................................8
Part D...........................................................................................................................................8
Part E...........................................................................................................................................8
Part D...............................................................................................................................................8
References......................................................................................................................................10

LIST OF FIGURES
Figure 1: Economic indicators of Mexico.......................................................................................4
Figure 2: Employment rate in Mexico.............................................................................................5

PART A
Economic conditions of Mexico
The Mexican economy is ranked as the 15th biggest economies in the world in nominal aspects
and listed as the 11th biggest by PPP, under the International Monetary Fund. The economic
freedom of Mexico is 64.8, positioning the economy at the 63rd 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.
Figure 1: Economic indicators of Mexico
(Source: Mexico - Economic Indicators, 2018)
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).
Figure 2: Employment rate in Mexico
(Source: Mexico Employment Rate. 2018)
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
Yield curve of Mexico has been reduced over the years but it is still comparatively higher than
other countries.

Jan-2002
Jan-2003
Jan-2004
Jan-2005
Jan-2006
Jan-2007
Jan-2008
Jan-2009
Jan-2010
Jan-2011
Jan-2012
Jan-2013
Jan-2014
Jan-2015
Jan-2016
Jan-2017
Jan-2018
0.00
2.00
4.00
6.00
8.00
10.00
12.00
10.09 10.10
8.62 8.68 8.25
7.43 7.49 7.89 8.03 7.41
6.51
5.29
6.45 5.83 6.23
7.47 7.72
Yield curve of Mexico
Business cycle stage of Mexico
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.
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.
PART B
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.

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.
PART C
Part A
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
Lenders
(Savers)
Financial
intermediaries
Borrowers
(Spenders)
Financial
market

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
Part B
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
Part C
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.
Part D
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.
Part E
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.
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.
PART D
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 9th May 2018].
Mexico Employment Rate. 2018. [Online]. Available through <
https://tradingeconomics.com/mexico/employment-rate>. [Accessed on 9th 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 9th May 2018].
Otero, G., 2018. Neoliberal reform and politics in Mexico: An overview. In Neoliberalism
Revisited (pp. 1-25). Routledge.