Taiwan’s central bank acknowledged in the clearest terms to date that it is intervening in foreign exchange markets, using the word that it had studiously avoided and vehemently protested until now. Regular late-session moves by state-backed banks to pare gains by Taiwan’s currency against the dollar are “a kind of intervention,” Governor Yang Chin-long told reporters after Thursday’s decision to maintain record-low interest rates. He used the English word “intervention” in his otherwise all-Mandarin response to a reporter’s question. Previously Yang had referred to such actions as “smoothing”.

Daily efforts to stabilize the Taiwan dollar began in earnest in June of last year, holding at around the 29.5 level against the U.S. dollar until September. Since then, it appears that the bank has been managing the currency’s appreciation, with intraday trading crossing the 28 line during most sessions this year, before retreating at close. Trading has been more erratic in the past two weeks - the currency weakened to 28.47 to the U.S. dollar at 11:56 a.m. Taipei time on Friday after closing at 28.31 on Thursday.

His remarks come after the U.S. Treasury decided in December to add Taiwan to its currency manipulator watch list. Yang suggested a week ago that the U.S. might designate Taiwan a currency manipulator, but that there wouldn’t be much negative impact for the local economy, given robust U.S. demand for semiconductors. Semiconductors, he said, were the main factor driving Taiwan’s trade surplus with the U.S. “If they want to reduce our trade surplus with them, then we could just stop selling them our chips,” he joked to lawmakers on March 11. “But they need them!

Suppose that Taiwan’s trade surplus with the U.S. would remain and that the Taiwan central bank stops its interventions, explain the transaction exposure that a Taiwanese company face if it has an account receivable denominated in U.S. dollar? If the Taiwanese company wants to protect the downside risk of the receivable while taking advantage of the favorable exchange rate movements, which hedging technique would you recommend and why?