Advanced Currency Hedging Strategies for Multinational Firms

XYZ Corporation, a U.S.-based multinational company, derives 40% of its revenue from its operations in Europe. Due to significant fluctuations in the EUR/USD exchange rate, the CFO is considering various currency hedging strategies to manage the risks associated with these foreign currency revenues.

XYZ Corporation currently reports revenue in USD. Over the past year, it has experienced a decline in the value of the euro relative to the dollar, affecting its profitability. The CFO has identified three potential hedging strategies:

• Forward Contracts: Lock in an exchange rate for a future date to convert euros to dollars.
• Currency Options: Purchase call options on euros, which provide the right but not the obligation to exchange currency at a specified rate.
• Natural Hedging: Adjusting the cost structure by sourcing materials from European suppliers to offset euro-denominated revenue.

Assuming a significant adverse movement in the euro is anticipated over the next 12 months, discuss the advantages and disadvantages of each currency hedging strategy XYZ Corporation could implement. Provide a detailed analysis that includes considerations regarding accounting treatment and the impact on cash flows.