March 1, 1998, Bechtel submits a franc?denominated bid on a project in France. Bechtel will not learn until June 1 whether it has won the contract. What is the most appropriate way for Bechtel to manage the exchange risk on this contract?
A) sell the franc amount of the bid forward for U.S. dollars
B) buy French francs forward in the amount of the contract
C) buy a put option on francs in the amount of the franc exposure
D) sell a call option on francs in the amount of franc exposure

Question

Quizplus · Accepted Answer

Buying a put option on francs in the amount of the franc exposure would protect Bechtel from the downside risk of a potential depreciation of the franc against the U.S. dollar, while still allowing them to benefit from a potential appreciation. This strategy allows Bechtel to limit their losses while still maintaining some flexibility in case the exchange rate becomes more favorable. Selling a call option would limit their potential gains, while buying francs forward may not provide enough protection in case of adverse exchange rate movements. Selling the franc amount of the bid forward for U.S. dollars could also lead to losses if the franc appreciates against the dollar.

March 1, 1998, Bechtel Submits a Franc?denominated Bid on a Project