Table of Contents
In this post, I’ll explain what the official Mexican Peso to USD exchange rate (FX) is, why its important, and how its calculated.
In another post, I’ll then show you how to create a python script to fetch this information from the Bank of Mexico’s API.
What is the MXN:USD exchange rate ?
An exchange rate is the rate at which one currency can be exchanged for another. It is often abbreviated as: FX <base_currency>:<exchange_currency>.
In this case, the MXN:USD exchange rate is the rate at which Mexican pesos can be exchanged for US dollars.
Why is the exchange rate important ?
When a company buys, sells, or invests overseas, it will probably hold cash or assets in another currency.
For example: A company in Mexico that buys stocks listed in the US stock exchange will buy them in USD.
At the end of the year, when the Mexican company is closing its books and preparing financial statements, the company will have to share with its investors what those stocks are worth in local currency (pesos).
What exchange rate should the company’s management use to report the value of the stocks it bought? Currency rates change every second, and unlike other markets, foreign exchange (FX) markets are open 24 hours a day, 7 days a week.
The same problem happens if the company decides to sell the shares:
It will have to report to investors (and tax authorities) what the stock was worth in local currency, when it was bought, and again when it was sold.
Fortunately governments all publish official rates, which can be used to report consistently and in a way everyone understands. In Mexico’s case, the official exchange rate is reported by the Bank of Mexico.
It is very important to use the correct rates, since miscalculating it can mean a disagreement with the tax authorities and may lead to paying hefty fines as a consequence.
Where can I find the official MXN:USD exchange rates ?
At the Bank of Mexico, in its foreign exchange market portal:
Once there, click on the “Mas información” link in the USD section.
The site will display three columns: ‘FIX’, ‘Publicación DOF’ and ‘Para Pagos’:
FIX: The average exchange rate for transactions up to midday for that day.
DOF: The rate published in Mexico’s official government page
Para pagos: The rate used for financial obligations and transactions.
The last one is the one we need to use.
What are the different rates & how are they calculated ?
The logic behind this three price system is as follows:
– The FIX rate is an average exchange rates for that day up to 12pm.
– The FIX rate is then published the next day in the ‘Diario Oficial de la Federación’ (DOF), a news site where the government publishes all legal information on a daily basis.
– The last rate is named ‘para pagos’ or ‘Para solventar obligaciones’. It’s the exchange rate published in the DOF the previous day.
We use the third column (Para solventar obligaciones) for financial reporting because it allows both sender and receiver to have 48 hours to plan transactions and get predictable amounts in both currencies.
You can see how the ‘FIX’, ‘DOF’, and Pagos rate move in the following table:
The ‘FIX’ rate, also called ‘Determinación’, for the 13th of July becomes the DOF value on the 14th of July and the ‘Obligaciones’ value on the 15th of July.
If we look at the table for a longer period of time, we can also see another pattern appear:
On weekends, there is no FIX or DOF exchange rate. Instead, the FIX value from Thursday, becomes the DOF value in Friday, and is used as the official exchange rate for Saturday, Sunday and Monday.
This is extremely useful, since it allows for financial and fiscal planning.
If you program a financial transaction to occur on a Monday you can know the FX four days in advance.
This allows us to effectively use the currency rate for tax planning and tax loss harvesting.
Next steps
Now that you understand how the official MXN:USD currency exchange is calculated, go to the next post to see how to write a python script to take advantage of Bank of Mexico’s API to easily fetch this data.