North Shore Equipment (NSE), a U.S. company, consistently purchases steel from a supplier in Japan with the invoice price denominated in Japanese yens. During the past year, NSE experienced substantial losses from foreign currency exchanges due to fluctuations in the exchange rate of the U.S. dollar to the Japanese yen. Therefore, Brian Johnson, NSE's CEO, has asked you to examine whether derivative financial instruments (e.g., foreign currency forward contracts and foreign currency options) to hedge the company's exposure to foreign exchange risk should be used going forward.

Required

Write a memo to CEO Johnson discussing any advantages and/or disadvantages of using forward contracts and options as a hedge against foreign exchange risk. Please be sure to recommend which type of hedging instrument you believe NSE should use. Make sure to justify your recommendation. Please make sure to properly cite any resources you use to answer this question.