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Hello Sir, I have seen your lecture but I was unable to understand the difference between these two terminologies Netting & Matching when trying to reduce foreign currency risk. completely. Please could you help me?
For example:
If we are receiving $600,000 from the customer. We are UK based company & we have to pay a foreign supplier payment of $500,000 where we are trying to hedge foreign exchange risk.Netting:
It is the NET amount that we have to consider by hedging foreign exchange risk such as:Receipt = $600,000
Payment = $500,000
Net receipt = $100,000Matching:
If we have regular income in $’s create an expense in $’s to offset the risk of exchange rate changes on income with the changes on expense– If we have income in $’s of $600,000, how do we create an expense in $’s?
– Do we create the expense for all $600,000?Your example of netting is correct (and only the $100,000 would be left at risk and would need hedging).
For matching, one was creating an expense in $’s would be, for example, if the company was intending to borrow money for some reason then to borrow it in dollars so that they then have an interest expense each year in $’s. Ideally they would want the expense to be of at least a similar amount to the income – the more equal they are then the more risk of exchange rate movements would have no effect.
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