Hedging Foreign Currency Exposure with Derivatives

Emily is a financial advisor working with a mid-sized corporation looking to hedge its foreign currency exposure due to increased international operations. The corporation earns revenue in euros, but its expenses are primarily in US dollars. Given the expectation of potential depreciation of the euro relative to the dollar, Emily needs to recommend a suitable derivatives strategy to mitigate this risk.

In your response, outline how Emily should utilize derivatives to manage the currency risk. Discuss the types of derivatives that could be appropriate for this situation, explain how they work, and analyze the potential benefits and limitations of each strategy.