Hedging Techniques

Hi Jatin,

In the context of the approaching exam it might be better if you take this overview.

Internal Hedging Devices

• Invoice in Home currency – Alter Currency of Invoicing

• Foreign Currency Overdraft – saves on transaction costs

• Leading & Lagging – refers to “speeds of settlement”
– (Lead and Lag Inter-company Payments)

• Netting
– Net Inter – Company Debts (Multi-Lateral Netting / Bi-Lateral Netting) or net-off individual $ receipts against individual $ payments, so that you are only at risk on the Net Amount.

• Matching – Match Income & Expenses / Receipts & Payments / Assets & Liabilities in the same Currency (Natural v Parallel Matching). For example, say company has income each year in a foreign currency ($’s), then it makes sure it creates an expense / liability in the same currency (say, buys goods from America or borrows money in $’s rather than the home currency and so has an interest expense/liability in $’s) – so as its income goes up and down so also does its expense go up and down in tandem with the same movement in the $ exchange rate.

• Netting and Matching are terms that are frequently used inter-changeably, although there are distinctions – strictly speaking netting is a term applied within a group context whereas matching can be applied both intra-group and third-party balancing.

• Adjust Contract Prices to the Forward Rate (or simply just factor in an extra profit margin!)

• Juggle Monetary Assets and Liabilities to reduce Exchange Risk

• Currency Protection Clause

Regards, Kevin Kelly