Hedging Exchange Rate | Currency risk using Matching
If you have a sales transaction with one foreign customer, and then a purchase transaction with another (but both parties operate with the same foreign currency) then this can be efficiently dealt with by opening a foreign currency bank account. For example:
1 November: should receive US$2m from US customer
15 November: must pay US$1.9m to US supplier.
Deposit the US$2m in a US$ bank account and simply pay the supplier from that. That leaves only US$0.1m of exposure to currency fluctuations. Usually, for matching to work well, either specific matches are spotted (as above) or there have to be many import and export transactions to give opportunities for matching. Matching would not be feasible if you received US$2m in November, but didn’t have to pay US$1.9m until the following May. There aren’t many businesses that can simply keep money in a foreign currency bank account for months on end.
Source: accaglobal