If a U.S.-based company regularly purchases goods from foreign suppliers in Japan with the invoice price denominated in Japanese Yen. And if the U.S. company has experienced several foreign exchange losses due to the depreciation of the Japanese Yen. Which type of hedging instrument (Foreign currency forward contract or foreign currency option) the company should employ? Please provide a justification for the selection. Also, compare the advantages and disadvantages of using (Forward contracts) and (Options) to hedge foreign exchange risk.

If a U.S.-based company regularly purchases goods from foreign suppliers in Japan with the invoice price denominated in Japanese Yen. And if the U.S. company has experienced several foreign exchange losses due to the depreciation of the Japanese Yen. Which type of hedging instrument (Foreign currency forward contract or foreign currency option) the company should employ? Please provide a justification for the selection. Also, compare the advantages and disadvantages of using (Forward contracts) and (Options) to hedge foreign exchange risk.

International Financial Management

14th Edition

ISBN:9780357130698

Author:Madura

Publisher:Madura

Chapter11: Managing Transaction Exposure

Section: Chapter Questions

Problem 25QA

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If a U.S.-based company regularly purchases goods from foreign suppliers in Japan with the invoice price denominated in Japanese Yen. And if the U.S. company has experienced several foreign exchange losses due to the appreciation of the Japanese Yen. I am confused about which type of hedging instrument (Foreign currency forward contract or foreign currency option) the company should employ. Can you please help me to understand a justification for the selection? Maybe to illustrate, you can compare the advantages and disadvantages of using (Forward contracts) and (Options) to hedge foreign exchange risk.
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