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August 1996 - June 2001. Dollar purchases through the put options mechanism

In August 1996, the Foreign Exchange Commission (composed of officials from the Ministry of Finance and Banco de México and responsible for Mexico's foreign exchange policy) stressed the need to build up the stock of international reserves without violating the principles inherent in the prevailing floating exchange rate regime. In the press release, the Foreign Exchange Commission highlighted the importance of reaching this objective without exerting undue pressure on the normal functioning of the foreign exchange market by allowing the central bank to purchase US dollars when the dollar supply was relatively abundant and allowing it to abstain from doing so when the Mexican peso was under pressure.

Under these criteria, Banco de México announced in Circular 71/96 the establishment of a mechanism to buy US dollars through put options. These options were auctioned on the last business day of each month, for an original amount set at USD 130 million, an amount later raised on five occasions to finally reach USD 250 million (see time series of amounts offered). During some months, the Foreign Exchange Commission determined that if 80% or more of the options were exercised before the 16th day of the corresponding month, an additional auction would have to be convened immediately.

As described in the research paper published by Banco de México (Una estrategia de acumulación de reservas mediante opciones de venta de dólares. El caso de Banco de México), option holders had the right to exercise them, partially or entirely, within the month following the month of the auction. Option holders could sell dollars to the central bank only if the exercise price (the exchange rate computed for the preceding day or FIX) was below its 20-day moving average.

The Foreign Exchange Commission decided to suspend the option sales mechanism in June 2001 given that the level of international reserves reached at that point no longer justified continued accumulation. Throughout the time the mechanism was in place, Banco de México accumulated USD 12.245 billion in international reserves (almost one third of the increase in international reserves during this period).