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ACCA Strategic Professional · Advanced Financial Management · Management of international trade and finance

A UK-based multinational has a US subsidiary that owes the parent USD 2 million, while the parent owes the same subsidiary USD 2 million for goods supplied. Both amounts are due on the same date. Which internal hedging technique removes the exposure on these balances most directly?

Netting is correct. The two intra-group USD balances are equal, opposite and due on the same date, so offsetting them leaves no net exposure and no conversion is needed. Forwards or swaps would add cost and are unnecessary here.

  1. ANetting the two balances so no currency exchange is neededCorrect
  2. BLeading the payment of the receivable
  3. CForward contract on the full USD 4 million
  4. DCurrency swap over the period

Explanation

Offsetting equal and opposite intra-group balances in the same currency leaves a net position of zero, so no exposure remains and no external hedge or transaction costs arise. Leading, forwards and swaps are other techniques that are unnecessary when the positions already cancel.

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