THE 1990 MEXICO AND VENEZUELA RECAPTURE CLAUSES - AN APPLICATION OF AVERAGE PRICE OPTIONS

The paper prices contingent contracts and options written on average p rices and uses the methodology to value the recapture clauses in the 1 990 Mexican and Venezuelan debt restructuring agreements. It is shown that the current values of the recapture clauses are less than one-qua rter 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 degre e 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.