abhishreshthaa
Abhijeet S
Netting and Offsetting:
A firm with receivables and payables in diverse currencies can net out its exposure in each currency by matching receivables with payables.
Thus a firm with exports to and imports from say Germany need not cover each transaction separately; it can use a receivable to settle all or part of a payable and take a hedge only for the net DEM payable or receivable.
Even if the timings of the two flows do not match, it might be possible to lead or lag one of them to achieve a match.
To be able to use netting effectively, the company must have continuously updated information on inter-subsidiary payments position as well as payables and receivables to outsiders.
One way of ensuring efficient information gathering is to centralise cash management
A firm with receivables and payables in diverse currencies can net out its exposure in each currency by matching receivables with payables.
Thus a firm with exports to and imports from say Germany need not cover each transaction separately; it can use a receivable to settle all or part of a payable and take a hedge only for the net DEM payable or receivable.
Even if the timings of the two flows do not match, it might be possible to lead or lag one of them to achieve a match.
To be able to use netting effectively, the company must have continuously updated information on inter-subsidiary payments position as well as payables and receivables to outsiders.
One way of ensuring efficient information gathering is to centralise cash management