Hedging Strategies for Currency Exposure

ABC Corporation is a multinational manufacturer based in the United States with significant exposure to foreign currency risk. Specifically, the company imports raw materials from Europe and has receivables in euros (EUR). Recently, the euro has been experiencing high volatility against the US dollar (USD), and ABC Corporation is concerned about the impact of currency fluctuations on its profit margins.

To mitigate this risk, ABC Corporation is considering several hedging strategies involving foreign exchange derivatives. Please discuss two derivative hedging strategies that ABC Corporation could employ to protect against euro depreciation. In your response, be sure to:

• Explain the mechanics of each strategy.
• Identify the advantages and disadvantages of each approach.
• Provide a recommendation for which strategy might be more effective and why.