Question
Johnson Bros wants to hedge a bid on a Japanese construction project. But because the yen exposure is contingent on acceptance of its bid, Johnson
Johnson Bros wants to hedge a bid on a Japanese construction project. But because the yen exposure is contingent on acceptance of its bid, Johnson decides to buy a put option for the 15 billion yen bid amount (a future receivable) rather than sell it foward. In order to reduce its hedging cost, however, Johnson simultaneously sells a call option for 15 billion yen with the same strike price. Johnson 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 Johnson's hedging strategy, while also using a graph.
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