Comment on bechtels hedging strategy

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Reference no: EM132001894

Suppose that Bechtel Group wants to hedge a bid on a Japanese construction project. Since the yen exposure is contingent on acceptance of its bid, Bechtel decides to buy a put option for the ¥15 billion bid amount rather than sell it forward. In order to reduce its hedging cost, however, Bechtel simultaneously sells a call option for ¥15 billion with the same strike price. Bechtel reasons that it wants to protect its downside risk on the contract and is willing to sacrifice the upside potential in order to collect the call premium.

a) Diagram Bechtel's profits/losses on each contract (long put and short call).

b) Diagram Bechtel's total profits/losses (both contracts jointly).

c) Comment on Bechtel's hedging strategy. Is Bechtel really protecting its downside risk? What if Bechtel loses its bid and the yen appreciates?

Reference no: EM132001894

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