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CA Final · Integrated Business Solutions (Multidisciplinary Case Study with Strategic Management) · Advanced Financial Management

Case: Sundaram Auto Components Ltd, Chennai, wants to net its group's foreign currency flows with its Thai associate through a central treasury. Sundaram owes the associate USD 300,000 and the associate owes Sundaram USD 180,000, both due on the same date. Which statement about bilateral netting is correct? Select the correct option.

Bilateral netting offsets the two opposing flows, leaving a net payment of USD 120,000 from Sundaram to the associate, because Sundaram owes more. Settling only the net amount cuts transaction costs and the amount exposed to exchange rate movement.

  1. AOnly USD 120,000 is settled, by Sundaram paying the associate, reducing transaction costs and exposureCorrect
  2. BOnly USD 120,000 is settled, by the associate paying Sundaram
  3. CBoth gross amounts are settled and netting only applies to forwards
  4. DUSD 480,000 is settled by Sundaram

Explanation

Bilateral netting offsets the two payables: 300,000 - 180,000 = USD 120,000 net payable by Sundaram. This reduces the number of transactions, bank charges and the exposed amount. The direction in option 2 is reversed.

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