Suppose that Bechtel Group wants to hedge a bid on a Japanese construction project. However, the yen exposure is contingent on acceptance of its bid, so 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. Comment on Bechtel's hedging strategy.

  • CreatedJune 27, 2014
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