Mexico: Navigating Currency Risk & Inflation Exposure in Agreements

Mexico offers deep trade and investment linkages with global partners and a diversified domestic market. That makes long-term contracts — infrastructure concessions, multi-year supply agreements, project finance loans, and energy offtake deals — commercially attractive. At the same time, such contracts are exposed to two related macro risks:

Currency risk: shifts in the Mexican peso (MXN) relative to major billing currencies, most often the US dollar, can alter the actual worth of both payments and returns.
Inflation risk: sustained increases in overall price levels gradually diminish fixed-rate income streams while pushing up local expenses tied to labor, materials, utilities, and taxes.

The Bank of Mexico targets low and stable inflation (a 3% goal with a typical tolerance band around that target). Nevertheless, episodes of elevated inflation and peso volatility — for example the broad inflation shock and exchange market moves during and after the global pandemic period — illustrate why firms must build mitigation into long-term contracts.

Forms of exposure within long-term contracts

Transaction exposure: anticipated inflows or outflows in MXN or other currencies whose amounts shift as exchange rates fluctuate.
Translation exposure: accounting effects that arise when subsidiaries prepare statements in pesos while parent firms compile them in another currency.
Economic exposure: long-run changes in profit potential and competitive position driven by differential inflation and enduring currency movements.
Indexation and passthrough risk: the risk that expenses tied to local inflation outpace unindexed revenue (or the reverse), compressing margins.

Contractual design strategies

Carefully crafted contracts serve as the primary safeguard, as they assign risk, outline adjustment frameworks and establish procedures for resolving disputes.

Invoicing currency clauses — clarify if payments will be settled in MXN or in a foreign currency (commonly USD). Buyers and sellers focused on exports frequently opt for USD billing to reduce MXN exposure during settlement.
Indexation provisions — link pricing to an objective inflation gauge, such as the official CPI or another inflation-adjusted unit. In Mexico, long-term toll arrangements under public-private partnerships, rental agreements, and regulated tariffs often adopt inflation indexation to maintain real economic value.
Escalation and price-review clauses — authorize periodic or event-driven pricing updates when cumulative inflation or cost metrics surpass agreed limits.
Currency band or shared-risk mechanisms — allocate FX fluctuations within a defined corridor between the parties; once movements exceed that corridor, renegotiation occurs or the buyer provides additional compensation to the seller.
Dual-currency or basket clauses — permit settlement in either currency or through a weighted basket to mitigate concentration risk.
Force majeure and macroeconomic change provisions — outline conditions under which severe macroeconomic disruptions justify suspending, terminating, or urgently adjusting prices, while also detailing dispute‑resolution procedures.

Financial hedging instruments and markets

When contractual clauses fail to completely eliminate exposure, firms turn to financial hedging instruments available in Mexico’s markets and in global markets.

Forwards and futures — forward FX agreements secure a predetermined exchange rate for settlement at a later date. USD/MXN futures are traded on both Mexican and international platforms (MexDer and leading global markets), offering clear pricing and standardized tenors.
Options and collars — currency options deliver one-sided protection: an MXN put option shields against depreciation while keeping potential gains. Collars confine losses and gains within set limits and can lower overall hedging expenses.
Cross-currency swaps — principal and interest payments in one currency are exchanged for those in another, aligning long-term debt obligations with the currency of incoming cash flows.
Inflation swaps and CPI-linked derivatives — these instruments let counterparties trade fixed payments for inflation-adjusted flows, providing insulation from domestic inflation whenever local revenues or costs are affected.
Local instruments linked to inflation — Mexico offers inflation-indexed securities and units that maintain real purchasing power; using these units is a frequent approach for managing long-term domestic liabilities.

Practical note: liquidity differs by maturity and instrument, with short- and mid-term forwards generally offering strong trading depth, while long-dated hedges remain accessible though typically more expensive, and many large projects therefore rely on layered strategies combining rolling forwards, options, and swaps to manage both cost and protection.

Operational and natural hedging strategies

Financial hedges can be complemented by operational measures that reduce net exposure.

Currency matching on the balance sheet — borrow in the currency of revenues or hold cash buffers in foreign currency so that liabilities and assets align.
Local sourcing and cost alignment — increase procurement in the invoicing currency or index local supplier contracts to the same reference as revenues.
Diversified revenue streams — serve multiple markets or customers invoicing in different currencies to reduce concentration risk.
Manufacturing footprint allocation — locate production where input costs naturally offset currency exposures (near-shoring to Mexico for USD revenue-generating exports creates natural currency alignment).

Sector-specific case studies

Export manufacturing: A North American firm with a 10-year supply agreement with a Mexican contract manufacturer may require the contract to be invoiced in USD. The buyer still faces translation exposure in Mexico but the seller secures revenue in a stable currency. The manufacturer can hedge residual MXN working capital needs with short-term forwards and match local wage inflation by indexing local subcontracts to CPI.
Infrastructure concessions: Toll road concessions often have revenues collected in local currency but financing in USD or with USD-linked debt. Common practice is to index tolls to CPI or to Mexico’s inflation-indexed unit, and to include revenue-sharing mechanisms when inflation exceeds predefined bands. Lenders typically require cross-currency swaps or revenue accounts to insure debt service in USD.
Energy and gas supply: Long-term gas offtake or power purchase agreements commonly denominate payments in USD to protect investors from peso weakness. Where host-country law or regulators require local-currency billing, contracts include pass-through clauses where fuel and transportation cost components adjust with clear indices.
Project finance and public-private partnerships: Lenders demand robust mitigation: revenue indexation, FX hedges, escrow accounts, and step-in rights. Models stress-test scenarios with peso depreciation and double-digit inflation spikes to size reserves and contingency facilities.

Legal, tax and accounting considerations

Governing law and enforceability: Choice of law and forum clauses matter. International creditors prefer neutral arbitration clauses and foreign governing law to reduce sovereign or local-judicial uncertainty.
Tax treatment: Currency gains and losses can have taxable consequences. Contracts with currency-based price adjustments must be structured to comply with tax rules on corporate income and invoicing. Work with local tax counsel to avoid unintended tax timing or valuation issues.
Accounting and hedge accounting: Under international accounting standards, firms must document hedge relationships and effectiveness to achieve hedge accounting treatment for FX and inflation hedges. This reduces earnings volatility but requires robust controls and documentation.

Implementation playbook: from negotiation to monitoring

Risk identification and quantification: model cash-flow sensitivities to MXN moves and inflation scenarios across multiple horizons. Use stress tests (e.g., 20% peso depreciation, 5–10 percentage point inflation shocks) and Monte Carlo scenarios for probabilistic view.
Contract drafting: include precise indices, rounding rules, adjustment frequencies, caps/floors, dispute resolution, and information-sharing obligations for index data. Avoid vague or subjective triggering language.
Hedge selection: combine contractual mitigation with financial hedges. Balance cost and effectiveness: a collar may be cheaper than a series of forwards but provides limited upside.
Operational alignment: match procurement, payroll and debt currency to revenue currency where feasible; use local CPI-indexed contracts to sync cost flows.
Ongoing governance: set limits, reporting lines, and a review cadence for macro updates; update model assumptions when monetary policy or fiscal outlook shifts.

Illustrative Examples

A foreign company enters a 12-year supply agreement with a Mexican buyer involving fixed MXN payments totaling MXN 100 million per year, anticipating cumulative inflation of about 40% over the period and projecting roughly 25% MXN depreciation against the USD throughout the term.

If payments stay fixed in MXN, real revenues fall as local inflation erodes purchasing power and the foreign investor’s USD-equivalent receipts decline with depreciation.
Mitigation package: include annual CPI-linked escalation at actual inflation, invoice in USD with a local-currency payment option indexed to CPI, and hedge expected USD/MXN cash flows with a layer of five-year forward contracts rolled forward plus a long-dated FX option collar to limit tail risk.
Trade-off: fully hedging the 12-year exposure with forwards might be prohibitively expensive or illiquid; layered hedging with options preserves upside if the peso unexpectedly appreciates while focusing protection on adverse scenarios.