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Hedging Exchange Rate | Currency risk using Netting

Hedging Exchange Rate | Currency risk using Netting

If you owe your Japanese supplier ¥1m, and another Japanese company owes your Japanese subsidiary ¥1.1m, then by netting off group currency flows your net exposure is only for ¥0.1m. This will really only work effectively when there are many sales and purchases in the foreign currency. It would not be feasible if the transactions were separated by many months. Bilateral netting is where two companies in the same group cooperate as explained above; multilateral netting is where many companies in the group liaise with the group’s treasury department to achieve netting where possible.

Source: accaglobal

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