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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,

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 Bechtels profits/losses on each contract (long put and short call).

b) Diagram Bechtels 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?

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