Final answer:
To hedge against currency risk, the company should use a forward contract to lock in an exchange rate today for the future receipt of 100 EUR. This instrument guarantees the USD value of the future currency receipt, offering protection against exchange rate fluctuations.
Step-by-step explanation:
If a company with a functional currency of USD is expecting to receive 100 EUR in 30 days and wants to hedge against currency exchange rate risk, the most suitable financial instrument would be a forward contract. A forward contract allows the company to lock in an exchange rate today for a transaction that will occur in the future. This translates to the company being able to know exactly how much the 100 EUR will be worth in USD in 30 days, regardless of the market fluctuations in the EUR/USD exchange rate.
Financial institutions or brokerage companies commonly offer such hedging services. They may charge a fee or create a spread in the exchange rate for providing this service. Through this mechanism, the firm can protect itself from the risk that the euro might depreciate against the dollar, which would otherwise lead to a lower value of the EUR received.