Currency options. Derivative financial instruments, used as an insurance against exchange rate risk

Abstract

This paper attempts to show the benefits offered by financial options contracts on foreign currencies, especially for importing companies because they serve to hedge the exchange rate risks they assume when they have debts in dollars. It also describes the main characteristics of options contracts on foreign currencies, their advantages in relation to other derivatives, as well as the terms and conditions of operation published by the Mexican Derivatives Market (MexDer)2 on July 27, 2006, In addition, an empirical study is presented showing the net benefits (profits minus costs) obtained by using these financial instruments to hedge exchange rate risk for importing companies. Finally, graphs are presented showing the volumes traded on the MexDer during 2006.