American Fast Track Inc. (AFT) operates high speed rail services in the U.S. AFT has

placed an order to purchase rail cars from the Xinjiang Locomotives of China in

June 2017. AFT has ordered 20 units of Multi-speed rail cars at the quoted price of

USD2.5 million each, which totals to a payment of USD50 million. All the 20 units of this

rail cars will be delivered to AFT in December 2017. AFT has agreed to pay 50% of its

payable when the order is delivered and another 50% to be settled in June 2018.

Xinjiang has invoiced this order in USD and will receive its receivables in USD. As the

receivable amount is substantially large in USD, Xinjiang will face the exchange rate

risk if USD continue to depreciate against the Chinese Yuan.

Since the beginning of 2017, the U.S. dollar had been steadily depreciating against

the Chinese Yuan (CNY). In January 2017, the dollar was trading around

CNY7.22573/$ and by June 2017, it softened to 6.72475/$. This represented a 8%

depreciation of the dollar against the CNY. Although many analysts had concluded

that the U.S. dollar was undervalued during this period, it continued to show signs of

weakening. Government interventions to strengthen the dollar was not being

discussed at this time.

While many forecasters were predicting an eventual appreciation of the U.S. dollar,

for Xinjiang, the size of this contract which was denominated in U.S. dollars was seen

as too large a transaction to be left uncovered. Therefore, you have been

contacted by Xinjiang to analyze and recommend alternatives as to how this

locomotive company can hedge its U.S. dollar transaction exposure. Having

collected the CNY/US$ exchange rates from various financial institutions that have a

dedicated foreign exchange department, you are provided with the following

quotes: