The 1990 Mexico and Venezuela recapture clauses: An application of average price options

Abstract

The paper prices contingent contracts and options written on average prices and uses the methodology to value the recapture clauses in the 1990 Mexican and Venezuelan debt restructuring agreements. It is shown that the current values of the recapture clauses are less than one-quarter of the maximum contractually possible and are a concave function of the standard deviation of the oil price. The paper also points out that the benefits of recapture clauses are not only an increased degree of risksharing between countries and creditors, but also a decrease in the likelihood of the debtor to default and an increased incentive to invest and adjust.