CME Group provides the FTIIE futures contract which is an excellent hedge to BONDES that currently represent 22% of the Mexican pesodenominated sovereign debt market. Issued by the Mexican Treasury, BONDES currently represent 22% of the Mexican pesodenominated sovereign debt market with $132 billion USD equivalent outstanding. BONDES are popular and highly liquid floating rate notes with coupons based on Banxico’s FTIIE rate and can be hedged using CME FTIIE futures as demonstrated in this paper.
Final coupon calculations are 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 fourweek 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, as seen in the whitepaper on settlement calculation. The similarities of both the index and the compounding calculation make CME FTIIE futures ideal instruments to hedge future BONDES 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.
To determine the correct number of FTIIE futures contracts required to hedge a BONDES position per month, we need to calculate hedge ratios. To do that, we want to find the equivalent notional value between the BONDES position and the FTIIE futures position.
Monthly 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 basis point value or tick value. For FTIIE contracts, this value is 200 MXN (20,000/100), which can be thought of as the monthly risk per basis point of notional value.
Now let us assume that we have a notional BONDES position worth 1B MXN. The annual risk per bp value is 100K MXN, equivalent to 1/100 of 1% x 1B MXN:
We now have the annual risk per bp for the BONDES position and the monthly risk per bp for the FTIIE futures. Given that we want to find the monthly hedge ratio, we need to convert the annual figure into a monthly one.
While it may be tempting to simply divide annual risk per bp of the BONDES position – which is 100K MXN – by 12, we can be more precise by using actual number of days in a month to arrive at this figure. The BONDES program uses a 360day count in its contract, so taking this figure divided by an actual number of days per month gives us our monthly risk per bp of the BONDES position. We will use a month with 31 days as an example.
Our last step is to calculate the hedge ratio between the monthly risk per bp of the BONDES position with that of the futures position.
We can also use these concepts to calculate the notational equivalent of an OTC contract that would change in value by the same amount as the FTIIE contract (200 MXN per bp per month).
Note that hedge ratios and notional equivalent values will change based on how many days are in the month in question as demonstrated in Exhibit 1 below.
Exhibit 1
MONTH 
DAYS IN MONTH 
Hedge Ratio 
NOTIONAL EQUIVALENT (PER CONTRACT, MILLIONS MXN) 

January 
31 
43 
23.23 
February 
28 
39 
25.71 
March 
31 
43 
23.23 
April 
30 
42 
24.00 
May 
31 
43 
23.23 
June 
30 
42 
24.00 
July 
31 
43 
23.23 
August 
31 
43 
23.23 
September 
30 
42 
24.00 
October 
31 
43 
23.23 
November 
30 
42 
24.00 
December 
31 
43 
23.23 
Source: CME Group
Using the information in the above table, we can calculate the required number of futures to hedge a position in BONDES and how this affects our trade. Let’s work through an example.
Imagine that on May 22, 2023, we own a hypothetical BONDES security maturing on November 30, 2023.
At the time of purchase of the BONDES, the forward interest rate curve is relatively constant around 11.30% with expectations of mild cuts beginning in November as shown by the dark blue line below in exhibit 2.
Exhibit 2
Source: CME Group
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 
# OF CONTRACTS TO HEDGE 1B MXN BONDES 
FUTURES PRICE AT May 22, 2023 

May 
31 
43 
88.67 
June 
30 
42 
88.71 
July 
31 
43 
88.71 
August 
31 
43 
88.72 
September 
30 
42 
88.72 
October 
31 
43 
88.78 
November 
30 
42 
89.24 
Source: CME Group
The expected coupon interest as of May 22, 2023, on the hypothetical MXN 1B notional of BONDES can be seen in the Exhibit 4 table below.
Exhibit 4
Coupon Date 
Days remaining in Coupon 
Coupon implied by daily rates % 
Coupon Interest (MXN Peso) 

22May23 



15Jun23 
24 
11.35 
7,563,947 
13Jul23 
28 
11.34 
8,818,389 
10Aug23 
28 
11.33 
8,815,588 
7Sep23 
28 
11.33 
8,810,546 
5Oct23 
28 
11.32 
8,802,141 
2Nov23 
28 
11.23 
8,737,712 
30Nov23 
28 
10.80 
8,402,745 
Total Coupon Interest  59,951,068 
Source: CME Group
If the revised market expectations are borne out, the coupon interest that would be earned (as depicted by the light blue line in the yield curve chart above) would be lower, as demonstrated in the Exhibit 5 table below.
Exhibit 5
Coupon Date 
Days remaining in Coupon 
Coupon implied by daily rates % 
Coupon Interest (MXN Peso) 

22May23 



15Jun23 
24 
11.13 
7,421,263 
13Jul23 
28 
10.75 
8,362,421 
10Aug23 
28 
10.32 
8,029,254 
7Sep23 
28 
10.01 
7,789,383 
5Oct23 
28 
9.86 
7,665,691 
2Nov23 
28 
9.71 
7,555,163 
30Nov23 
28 
9.70 
7,540,614 
Total Coupon Interest  54,363,788 
Source: CME Group
We see that the total amount of coupon interest earned would be lower by 5,587,280 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 and around 11.33%, the prices of FTIIE futures would have been those in the column below labelled “Original 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 “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 holding. Using the month of June as an example, we can see that this would net MXN 285,600, which is calculated by multiplying the number of contracts by the change in price since purchase by 200 MXN.
The table below shows payouts for each month.
Exhibit 6
Futures as of May 22, 2023 
# of Contracts 
Original Purchase Price 
Market Price 
Price Change Since Purchase (BPS) 
Payout 

May 
43 
88.67 
88.67 
0 
0 
June 
42 
88.71 
89.05 
34 
285,600 
July 
43 
88.71 
89.57 
86 
739,600 
Aug 
43 
88.72 
89.98 
126 
1,083,600 
Sep 
42 
88.72 
90.15 
143 
1,201,200 
Oct 
43 
88.78 
90.32 
154 
1,324,400 
Nov 
42 
89.24 
90.34 
110 
924,000 
298 
Total Payout 
5,558,400 
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.
Mexican FTIIE rate futures at CME Group are an excellent hedge for the interest rate risk variability of BONDES 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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