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ACCA Applied Skills · Financial Management · The nature and types of risk and approaches to risk management

Which of the following is an internal technique that a company can use to reduce transaction risk on foreign-currency receipts and payments, without using a financial institution?

Matching receipts and payments in the same currency is the internal technique. By offsetting inflows against outflows, only the net exposure remains at risk, and no bank product is needed. Forwards, options and swaps are external hedges arranged through financial institutions.

  1. AMatching receipts and payments in the same currencyCorrect
  2. BBuying a currency option from a bank
  3. CTaking out a forward exchange contract with a bank
  4. DEntering into a currency swap with a bank

Explanation

Matching offsets foreign-currency receipts against payments in the same currency, so only the net amount is exposed. This is an internal technique. Forward contracts, options and swaps are external hedging instruments arranged with a financial institution.

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