ABSTRACT
The futures and options markets offer highly standardized foreign exchange contracts written against the futures clearing house for a fixed number of currency units to be delivered on a specific date. This chapter describes the nature of futures and options markets and how individuals and corporations can use futures and options contracts either to hedge exchange rate risk or speculate. To describe how futures contracts can be used to hedge, it focuses on a case of an investor who is planning to invest in Mexican Treasury bills, better known as CETES. A futures contract is a standardized fixed-date obligation to make or receive delivery of the underlying commodity at the defined delivery date. There are two types of options contracts: put and call. A put option contract confers its holder the right to sell foreign exchange at the strike price. A call option contract grants its holder the right to purchase foreign exchange from the writer at the strike price.
