Question: Better Food Corporation
Better Food Corporation (BFC) regularly purchases nutritional supplements from a supplier in Japan with the invoice price denominated in Japanese yen. BFC has experienced several foreign exchange losses in the past year due to increases in the U.S.-dollar price of the Japanese currency. As a result, BFC's CEO, Harvey Carlisle, has asked you to investigate the possibility of using derivative financial instruments, specifically foreign currency forward contracts and foreign currency options, to hedge the company's exposure to foreign exchange risk.
Required: Draft a memo to CEO Carlisle comparing the advantages and disadvantages of using forward contracts and options to hedge foreign exchange risk. Make a recommendation for which type of hedging instrument you believe the company should employ and provide your justification for this recommendation.