Evaluating Derivatives for Currency Risk Management

As the Chief Investment Officer of a mid-sized investment firm, you are tasked with reviewing the firm's risk management strategy that incorporates derivatives. The firm has a significant allocation in international equities and is concerned about currency fluctuations impacting returns. You have been asked to evaluate the use of currency forwards and options as hedging instruments.

Your analysis should include a discussion of the advantages and disadvantages of using these derivatives, the potential impact on portfolio performance, and the implications for risk management. Provide specific examples of how currency forwards and options can be utilized effectively in this context.