Venezuela: Macro Landscape and Trade Idea

Introduction

Venezuela is going through one of the worst political and economic crises in the world. The currency is crashing again, inflation is returning to triple digits, and the president is thought to be the head of a narco-trafficking cartel. Moreover, the United States is increasing sanctions and military pressure on President Nicolás Maduro’s government under President Trump’s renewed aggressive approach.

The situation is additionally alarming because Venezuela defaulted on its debt in 2017. Despite remaining shut out of global markets ever since, its distressed bonds are some of the best-performing emerging-market assets of the year. Investors are betting that the combination of an economic collapse and political pressure will lead to significant changes, including a change in government, which will enable the economy to recover and restructure.

Venezuela’s Economic Freefall and Hyperinflation

Venezuela’s economy keeps getting weaker as its currency depreciates and inflation rises. Its currency, the Bolívar, has lost more than 80% of its value against the dollar in just one year, making it close to worthless. Inflation has risen again after a brief break, and the IMF expects it to reach about 270% this year. Prices are rising faster than wages can keep up, making living standards even worse.

The poverty rate reveals this collapse: about 86% of the population lived in poverty in 2024. Venezuela’s economy has shrunk by about 75% since 2014 thanks to years of printing money, poor fiscal management, and a decline in oil revenues.

Notably, the oil industry, which used to be Venezuela’s engine of growth, has become unstable. After years of poor management, corruption, and U.S. sanctions that make it challenging to export crude oil, production at state-owned PDVSA has dropped. To feed the deteriorating oil sector, the government has continuously printed more and more money, creating an inflationary spiral.

As people grow increasingly angry over lost wages, shortages, and worsening public services, this economic downturn has also strengthened political pressure on Maduro. Internationally, he is considered to have stolen last year’s elections. This view has been further strengthened by Venezuela’s opposition leader, María Corina Machado, who was just awarded the Nobel Peace Prize for “keeping the flame of democracy burning amidst a growing darkness” that she dedicated to Donald Trump. Maduro has also publicly been accused by Trump to be the head of the drug trafficking cartel “Cartel of the Sun” together with other Elite Military Members and Political Figures of Venezuela. Recently, Secretary of State Marco Rubio announced plans to designate the group as a foreign terrorist organization. The U.S. has even offered $50 million for Maduro’s capture.

U.S. Sanctions and the “Maximum Pressure” Campaign

Evidently, there is an aggressive U.S. pressure campaign on top of Venezuela’s domestic collapse. After Maduro’s controversial re-election in 2018, Washington has stepped up sanctions that make it harder for the regime to get funds from around the world and to profit from oil revenues. The U.S. declines permission to the country into its markets, and, therefore, it is unable to legally restructure its defaulted debt.

The Trump administration became even more aggressive in 2025, sending warships, thousands of troops, and F-35 jets to the Caribbean to fight drug traffickers. The UN has officially stated that the U.S. has sunk several ships near Venezuelan waters and killed dozens of people in interdiction operations, which they say could be extrajudicial killings.

The Bond Rally

Despite the chaos, Venezuelan sovereign and PDVSA bonds have risen quite substantially this year. Following the country’s default in 2017, the bonds were worth about 16 cents on the dollar at the beginning of 2025. By the middle of October, prices had jumped up to about 25 cents, giving investors returns of more than 50% YTD, beating all other EM credit.

Why? These bonds are now comparable to cheap options on political change.

If Maduro goes down or has to negotiate, Venezuela might be able to get back into the market, begin investing in oil once again, and initiate restructuring. Venezuela has the largest oil reserves in the world, so creditors think that long-term recovery values could be much higher than the current prices.

Three things are making people desire these bonds:

A higher chance of regime change or talks: The combination of the economy falling apart and pressure from the U.S. has brought back hopes that things could change.
It’s easier to hold the bonds now that there are fewer sanctions: Sanctions against the government are still in place, but rules about secondary trading have become less strict. In 2022, JPMorgan put Venezuelan bonds back on the EMBI, which brought in more investors.
The story of the recovery that is rich in resources: Venezuela’s oil industry could get foreign investment and make a lot more oil revenue if the government changed. Investors who buy at 20 to 25 cents are basically betting that future restructuring payouts will be between 50 and 70 cents or more. PDVSA bonds have gone up in value along with sovereign bonds, which means that investors think they will be treated the same way in any future restructuring.

But this rally isn’t free of risk. Venezuela has already had a significant false dawn: the Guaidó episode in 2019, when investors thought Maduro was about to fall, quickly resolving not only in the continuation of the regime but also in major decline of investor confidence, causing bonds to drop again.

Additionally, even if Maduro is gone, there will still be huge problems. Venezuela’s total debt, which includes unpaid interest, defaulted bonds, arbitration claims, and bilateral loans, is about $150 billion. Any restructuring will be one of the most difficult tasks to accomplish in modern EM history.

Some analysts suggest that the current rally may be ahead of the facts. For example, UBS says that investors should cut back on their exposure because waiting years for an uncertain payoff ties up cash that could earn better returns elsewhere.

The Opportunity: Why Trade a Default?

Why would a rational investor buy the debt of a country with a collapsed economy, a government under indictment, and sanctions preventing debt restructuring? The answer lies in asymmetry.

The market for Venezuelan debt is currently inefficient. In fact, it is driven more by news and speculations about U.S. military movements and political news than by fundamental credit analysis. This creates a distortion in valuations. While the bonds have rallied recently, we believe the market is struggling to accurately price the “binary” nature of the outcome.

We are not buying these bonds for yield, as there are, in fact, no coupons. On the other hand, we want to take advantage of a specific situation. The current geopolitical pressure on the Maduro administration has created a window where the probability of regime change is non-zero, yet the potential upside (recovery value) is vastly higher than the current downside risk (scrap value).

However, trading on this type of speculations can be very risky. As recent history taught us, the optimism that characterized the 2019 interim government period can have disastrous consequences. At that time, many investors were caught offside during the Guaidó rally, suffering significant losses when the status quo persisted.

Quantitative Model: The Binary State Pricing Framework

To value these bonds correctly, we must stop treating them like bonds.

In a normal fixed‑income environment, we would look at yield‑to‑maturity and credit spreads. But Venezuelan bonds have been in default since 2017, and principal repayment is entirely dependent on a political regime change. If the current regime stays, the cash flows are zero. If the regime falls, the cash flows could be substantial.

We must, therefore, reframe this asset class. These are no longer fixed‑income instruments in the traditional sense but can be best understood as deep out‑of‑the‑money call options. The investment thesis does not rely on a stream of coupons, but on the “ticket value” of the bond, a value that is unlocked exclusively by a structural shift in the regime.

Therefore, we adopt a contingent claims approach, modelling the bond price $P_{B}$ as a probability‑weighted average of two discrete future states.

The Binary State Derivation

Let $\Omega$ represent the state space at time $T$ .

We define two mutually exclusive and exhaustive macroscopic states:

$S_{1}$ : Regime Change / Restructuring. The current administration is replaced by a market-friendly government recognized by the US and international creditors. Sanctions are lifted, and a debt restructuring process is initiated.

$S_{0}$ : Status Quo / Failed Transition. The current administration retains effective control. US sanctions remain in place or are tightened. No restructuring occurs, and the bonds remain in default with limited secondary market liquidity.

Let $\pi$ be the risk-neutral probability of state $S_1$ occurring, denoted as $\mathbb{Q}(S_1)$ . Consequently, $1-\pi$ is the risk-neutral probability of state $S_0$ ( $\mathbb{Q}(S_0)$ ).

The price of the bond $P_B$ is given by the expectation of its recovery value $R$ under the risk-neutral measure $\mathbb{Q}$ , discounted at the risk-free rate $r$ :
$P_B = e^{-rT}\mathbb{E}^{\mathbb{Q}}[R]$ .

Expanding the expectation for the binary states:

$P_B = e^{-rT}\left[\pi\cdot \mathbb{E}^{\mathbb{Q}}[R \mid S_1] + (1-\pi)\cdot \mathbb{E}^{\mathbb{Q}}[R\S_0]\right]$

Let $R_1 = \mathbb{E}^{\mathbb{Q}}[R \mid S_1]$ be the expected recovery value in a restructuring scenario, and $R_0 = \mathbb{E}^{\mathbb{Q}}[R \mid S_0]$ be the recovery value in the status quo scenario. Assuming $T$ is small and interest rates are relatively low, the equation simplifies to the standard binary pricing formula:

$P_B = \pi R_1 + (1-\pi)R_0$

This linear equation allows us to solve for the market-implied probability of regime change $\pi_{implied}$ if we can robustly estimate $R_0$ and $R_1$ .

Estimation of $R_0$

$R_0$ represents the market value of the bonds in a scenario of perpetual default and isolation. This value is non-zero due to the “option value” of a potential restructuring in the future and the legal value of the claim (ability to sue for assets, though difficult to enforce).

Historically, Venezuelan sovereign bonds have traded in a range of 6 to 11 cents on the dollar during periods of maximum pessimism and inactivity (e.g., 2020-2023). This floor reflects the “scrap value” of the debt. Recent data suggests a floor of around 10 cents is a conservative estimate for $R_0$ in a scenario where the current U.S. pressure campaign fails and sanctions persist indefinitely.

Estimate: $R_0 \approx 10.00$ (cents on the dollar).

Estimation of $R_1$

$R_1$ is the expected value of the new instrument package received in a restructuring. This is a function of the sovereign’s capacity to pay (debt sustainability) and the willingness of creditors to accept haircuts.

Standard Debt Sustainability Analysis (DSA) for Venezuela suggests a nominal haircut of 50% to 75% is necessary to restore sustainability. Analysts at Citi have estimated a recovery value in the mid-40s based on an exit yield of 11% for new bonds, while Aberdeen’s model suggests a recovery range of 30-45 cents. In addition, Moatti & Muci Proposal (Harvard Kennedy School) suggests aggressive face value haircuts of 70% are needed, implying a recovery on the bond component of roughly 30 cents, but supplemented by value recovery instruments.

If we assume a standard “Vanilla” restructuring without oil warrants, $R_1$ might be estimated conservatively at 40 cents. However, treating $R_1$ as a fixed scalar ignores the structural reality of modern sovereign restructurings for commodity exporters. The “upside” potential is almost always captured via Value Recovery Instruments (VRIs).

Anticipating the Restructuring Package

To accurately estimate the recovery value ( $R_1$ ), we must anticipate what a debt restructuring deal would actually look like. In the case of Venezuela, a standard bond swap will likely fail because of a fundamental “valuation gap” between the borrower and the lenders.

On one side, the Venezuelan government faces a disrupted oil industry and cannot commit to high fixed payments without risking another immediate default. They need to base their payments on conservative oil price assumptions.

On the other side, however, creditors know that Venezuela has the largest oil reserves in the world. They are unwilling to accept a massive haircut based on today’s distressed production levels, as they expect that future revenues could be substantially higher.

To solve this situation, we utilize the restructuring framework proposed by Moatti & Muci at the Harvard Kennedy School. Their proposal suggests splitting the recovery package into two distinct instruments consisting of a fixed-income component $B_{new}$ and an equity-like component $V_{warrant}$ , specifically an Oil Warrant.

$R_1 = B_{new} + V_{warrant}$

This structure is fundamental for our model because it changes the nature of the payout. We are not just pricing a bond, but rather a conditional upside. The warrant acts as a bridge: it grants creditors the “upside” of a recovery in the oil sector without forcing Venezuela to commit to fixed payments it might not be able to afford. Financially, this warrant behaves exactly like a Call Spread on the price of oil, in fact it has a “trigger” price and a “cap” price.

This introduces convexity to the trade. In a high-volatility environment, like the case of global energy market, the value of this warrant increases significantly. By ignoring this component, traditional models would drastically undervalue the potential recovery package. Therefore, we price this component separately using the Black-76 model, the standard for commodity options.

Modelling the Oil Warrant Structure

Based on the proposal by Moatti & Muci (Harvard Kennedy School), the payout structure for a single warrant in any given year t can be modeled as:

$\mathrm{Payout}t = \min\left( \mathrm{Cap},\ \max\left(0,\ P_f (S_t - K{trigger})\right) \right)$

Where:

$S_t$ : The average price of the reference crude (e.g., Brent or Venezuela Basket) in year t.

$K_{trigger}$ : The Trigger Price (Strike). This is set at the baseline oil price projection. Moatti & Muci suggest $K_{\text{trigger}} = $60/\mathrm{bbl}$

$P_f$ : The Payment Factor. This is the participation rate, or the slope of the payout. The proposal suggests $P_f = 0.40$ ($400,000 payment per $1 increase in oil price per $1mm notional).

Cap: The maximum annual payment. The proposal suggests a cap of $7.00 per $100 notional. This cap is reached when the oil price hits $K_{cap} = K_{trigger} + \frac{\mathrm{Cap}}{P_f} = 77.50$ .

Financially, this payout structure is equivalent to a Call Spread on the underlying oil price:

Long $P_f$ Call Options with Strike $K_1 = K_{trigger} = 60$

Short $P_f$ Call Options with Strike $K_2 = K_{cap} = 77.50$

Valuation via Black-76

We value these options using the Black-76 model. The value of the warrant package $V_{warrant}$ is the sum of the present values of these call spreads over the life of the warrant.

The Black-76 formula for a European call option $c(F,K,T,\sigma,r)$ is:

$c = e^{-rT}\left[F N(d_1) - K N(d_2)\right]$

Where:

$d_1 = \frac{\ln(F/K) + (\sigma^2/2)T}{\sigma\sqrt{T}}, \qquad d_2 = d_1 - \sigma\sqrt{T}$

Parameters for November 2025:

$F$ (Forward Price): Current Brent spot is approx. $62.85. We assume the forward curve is relatively flat or slightly backwardated, utilizing $F \approx 63$ for valuation.

$K_1 = $60.00/\mathrm{bbl}$

$K_2 = $77.50/\mathrm{bbl}$

$\sigma$ (Volatility) is a crucial parameter. The CBOE Crude Oil Volatility Index (OVX) is trading at 36.30%. This is a high volatility regime, significantly increasing the value of the option.

$r$ (Risk-Free Rate): 10-Year US Treasury Yield is 4.06%.

$T$ (Time): We value a strip of warrants. For a single year representative payment at $T = 1$ .

Valuation Logic:

Since $F(63) > K_1(60)$ , the long call component is in-the-money. The short call at $77.50 is out-of-the-money. High volatility ( $\sigma = 36%$ ) significantly increases the time value of the long call option and, crucially, increases the probability of the oil price reaching the cap, but the long position typically has higher Vega when near-the-money compared to the far OTM short call.

$\mathrm{Vega} = F e^{-rT} N'(d_1) \sqrt{T}$

Because the Trigger strike $K_1$ is closer to the Forward price $F$ than the Cap strike $K_2$ , the Vega of the long position exceeds the Vega of the short position. Therefore, the value of the warrant $V_{warrant}$ has positive Vega:

$\frac{\partial V_{warrant}}{\partial \sigma} > 0$

This means that the bond recovery value $R_1$ expands as oil market volatility increases.

The Black-76 model using our parameters yields a theoretical value for the long call component of 10.02 and the short call component of 4.27, resulting in a net call spread value of 5.75. When we apply the required Payment Factor $P_f = 0.40$ the fair value for a single year’s warrant translates to 2.30 cents per dollar of face value.
To determine the full value of the package, we calculate this cash flow over a standard 5-year recovery timeframe, which yields a total Net Present Value (NPV) for the warrants of approximately 11.50 cents. Adding this convexity premium to the estimated “Vanilla” bond recovery of 40 cents results in a total derived recovery value $R_1$ of 51.50 cents.

$R_1 = 40.00 + 11.50 = 51.50\ \text{cents}$

Polymarket Microstructure: The Implied Anomaly

We utilize Polymarket to estimate the probability parameter $\pi$ , as it offers specific contracts for our strategy. However, it is important to take into consideration the binary payout structure, possible liquidity constraints due to low volume for the contracts traded in the platform, and the high volatility of the quotes that reflects retail traders’ sentiment.

We analyze the conditional probability of Maduro’s survival $(S)$ given a US military engagement $(E )$ .

Contract A (Intervention): “US x Venezuela military engagement by Dec 31” at price $P(E) = 0.44$ .

Contract B (Conditional Survival): “Will Maduro’s rule survive a US military engagement?” at price $P(S \mid E) = 0.25$ .

The “Bay of Pigs” scenario is defined as the joint event where the US intervenes $(E)$ but the regime survives $(S)$ .

The implied joint probability is calculated as:

$P(E \cap S) = P(E), P(S \mid E)$

$P(E \cap S) = 0.44 \times 0.25 = 0.11\ (11%)$

Assuming $R_1 \approx 45$ cents and $R_0 \approx 10$ cents, the probability of successful regime change via war is:

$P(E \cap S^c) = 0.44 \times 0.75 = 0.33$

If we also assume that regime change only happens via war, then $\pi \approx 33%$ .

Model Bond Price:

$\widehat{P_B} = 0.33(45) + 0.67(10) = 14.85 + 6.70 = 21.55\ \text{cents}$

With the current bond price at 25 cents, the market is effectively underpricing the risk of a “Bay of Pigs” failure.

Trade Hedge Strategy

Our analysis reveals a dangerous asymmetry. While the Oil Warrant Convexity suggests that the recovery value $R_1$ is significantly undervalued by the market, the binary model also highlights a very important risk: the “Bay of Pigs” scenario. In this specific outcome, where a US intervention fails to dislodge the regime, the bond price is projected to collapse from 25 cents to its scrap value of 10 cents, resulting in a 60% capital loss. A standard “long-only” approach would leave the portfolio dangerously exposed to this binary event.

Therefore, we construct a trade that pairs the long bond position with a specific Polymarket contract to hedge our exposure.

The long position consists of Venezuelan Sovereign Bonds VENZ 2027, with current price $P_B = 25.00$ cents per dollar face and target $R_1 \approx 45\text{-}50$ . The second leg, our hedge, is buying the Polymarket Contract “Will Maduro’s rule survive a US military engagement?” at current price $P_H = 25$ cents

We derive the optimal hedge ratio $\delta$ to neutralize the P&L in the “Bay of Pigs” scenario.

Let V be the portfolio value:

$V = Q_B P_B + Q_H P_H$

Where $Q_B$ is the face value of bonds held, and $Q_H$ is the number of hedge contracts.

The Immunization Equation requires:

$Q_B(\Delta P_B) + Q_H(\Delta P_H) = 0$

Given $\Delta P_B = -0.15$ cents (drop from 25 to 10) and $\Delta P_H = +0.75$ cents (gain from 25 to 100):

$Q_B(-0.15) + Q_H(0.75) = 0$

$\frac{Q_H}{Q_B} = \frac{0.15}{0.75} = 0.20$

The Optimal Hedge Ratio is therefore $\delta = 0.20$ .

The scenario analysis of our strategy is the following:

Conclusion

Venezuela’s debt is no longer just a credit problem; it’s now an issue of politics. The economy is falling apart, inflation is rising again, oil production is down, and sanctions are still in place. At the same time, the U.S. pressure campaign and rising instability within the country have made it possible to bring about a regime change, which is the only way to restructure and get back on track.

Bond prices now show this situation: either Maduro stays in power in Venezuela and bonds trade close to scrap value, or a transition leads to much higher recoveries backed by oil-linked warrants and new access to capital markets. Our model suggests that markets might not be giving enough weight to a failed intervention scenario. This means that current prices are more optimistic than the fundamentals support.

The opportunity is real but highly asymmetric. Investors should think of Venezuelan debt as a deep OTM call on political change. This means they need to be disciplined about how they assess the probabilities and hedge their bets. Without that discipline, hope turns into guesswork. With it, the trade has one of the most mispriced risk-reward profiles in emerging markets right now.

References

[1] Moatti, Thomas and Muci, Frank, “An Economic Framework for Venezuela’s Debt Restructuring”, 2019

[2] Black, Fischer, “The pricing of commodity contracts”, 1976

[3] Aberdeen Investments, “A tale of two debt restructurings: Venezuela and Lebanon”, 2025

[4] Daniels, Joe and Brazón, Ana Rodríguez, “Venezuela’s dismal economy piles pressure on Nicolás Maduro”, 2025

[5] Stott, Michael, “What is Venezuela’s ‘Cartel of the Suns’?”, 2025

[6] Financial Times, “What Trump wants from Venezuela”, 2025

Published by BSIC on 30 November 202530 November 2025

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