Problem:
ABC Corporation regularly purchases nutritional supplements from a supplier in Japan with the invoice price denominated in Japanese Yen. ABC has experienced several foreign exchange losses in the past year due to increase in the U.S. dollar price to Japanese currency. As a result, ABC's CEO has asked you to investigate the possibility of using derivative financial instruments-specifically foreign currency forward contracts and foreign currency options-to hedge the company's exposure to foreign exchange risk. Required Draft a memo to the CEO comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk.
Required:
Question: Make a recommendation regarding which type of hedging instrument you believe the company should employ and provide your justification for this recommendation.
Note: Be sure to show how you arrived at your answer.