Exchange-Rate Risk Mitigation with Price-Level-Adjusting Mortgages : The Case of the Mexican Udi

In 1995, Mexico introduced a price-level-adjusting unit of account called the Unidad de Inversion (UDI). Loans denominated in UDIs maintain their purchasing power and provide a real rate of return in pesos. This study examines the real rate of return earned by dollar investors in UDI mortgages and the extent to which the inflation-adjusting aspect of the UDI mitigates losses from currency devaluations. Exchange-rate patterns relative to purchasing power parity are also examined to find investment strategies that increase the real-dollar rate of return on investments in Mexico's UDI mortgages