Part I: Exchange Rate Risk

Your mainland China-based company just won a bid of US$500,000 for the installation of an

international security system for a large manufacturing firm in the United States on September 20,

2023. In accordance with the contract, the US firm had transferred 10% of the contract amount (i.e.,

US$50,000) as deposit on the contract with the balance due at the time the system was completed.

Your company's production manager is confident that the installation will be completed within the

3-month period stipulated in the bid. As a result, your company is planning on receiving US$450,000

on December 20, 2023.

The chief financial officer (CFO) of the company is concerned that the US$ might depreciate during

the next three months (equivalently, RMB might appreciate during the next three months). He asks

your team to search for ways to reduce the exchange rate risk resulted from the outstanding US$

receivable.

Task: search market information and find two feasible alternatives to hedge the risk. Conduct the

analysis and compare the results of two hedging strategies in terms of final cash flow in RMB. Make

assumptions whenever necessary. (One assumption for all: assume no restriction on RMB or USD

in/out of mainland China.)

Write a report to be submitted to the CFO of your company.

Note: for this group work, no further information or clarification will be offered by the instructor.

The group as a whole makes the decision.