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Hi John, first of all thanks a lot for your continuous support.
I want to ask about foreign exchange hedging methods regarding netting and matching. In a question from June 10 exams MULTIDROP, they have first converted it to a common currency where there where different group subsidiaries and outside companies were involved.
And another question MJY June ’05 they have not converted all the transactions to a common currency in a similar scenario, instead they have ignored the transactions in £ (which is home currency) and then determined the net exposure in foreign currencies (€ & $).
Why the different methods are used in eqch of these question?
There are no rules about this – it is up to the individual company/group how they want to do their netting.
In Multidrop, the question specifically said that the had agreed that all settlements would be in Euros (the principal was Multidrop (Europe)), and so everything was converted to Euros.
In MJY, it was a UK based company with foreign subsidiaries. It did not specify in what currency to do the netting, but since it was UK based and all of the exchange rates given were against the £, it rather forced you to assume that the netting would all be done after converting to £’s.
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