Hedging with Foreign Exchange Derivatives

Carson Company expects that it will receive a large order from the government of Spain. If the order occurs, Carson will be paid about 3 million euros. Because all of its expenses are in dollars, Carson would like to hedge this position. Carson has contacted a bank with brokerage subsidiaries that can help it hedge with foreign exchange derivatives.

1. How could Carson use currency futures to hedge its position?

2. What is the risk of hedging with currency futures?

3. How could Carson use currency options to hedge its position?

4. Explain the advantage and disadvantage to Carson of using currency options instead of currency futures.