If a Japanese company is concerned about the appreciation of the U.S. dollar, what should it buy for protection?

In this scenario, if a Japanese company is worried about the appreciation of the U.S. dollar, it should buy yen puts for protection. By purchasing yen puts, the company secures the right to sell yen at a predetermined price. As the U.S. dollar appreciates, it means that the value of yen decreases relative to the dollar. If the exchange rate moves unfavorably for the company, the puts will increase in value, offsetting losses incurred from the exchange rate changes.

This strategy effectively hedges against the risk of needing to convert yen into a stronger dollar at a less favorable exchange rate, thus safeguarding the company’s financial interests. Such a move ensures that the company can manage its currency risk while engaging in international transactions or maintaining dollar-denominated assets.