Sir,
What is netting and what is matching?
and what is the difference between the two?
regards
jatin
What is netting and what is matching?
and what is the difference between the two?
regards
jatin
Ask the Tutor ACCA FM
Hedging Techniques
Netting is when companies net foreign income with foreign expenditure thus only hedging the difference. Eg, If they expect $50,000 dollars to come in in 3 months time and need to pay out $150,000 dollars they would net the $50,000 and possibly "match" the $100,000 liability required in 3 months time with an asset, by depositing enough funds at the interest rate divided by 3/12 in sterling (creating an asset to match the liability) and exchanging at the spot rate today, then investing in a dollar account x the dollar rate of interest.
Hope this makes sense.
Hope this makes sense.
15y ago#2Hi 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
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
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