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In the previous article, we have discussed about the matching internal hedging method. 

 This article is on the next method which is the:

 Netting Method
This method is similar to matching. The only difference is that matching includes the cash-flows of third parties whilst netting involves strictly the cash-flows of the subsidiaries of the group.Here, the subsidiaries net their foreign currency assets and liabilities arising out of transactions with each other.
There are two types of netting namely:
Bilateral netting which involves just two subsidiaries and for multilateral netting, it is between several subsidiaries.
As multilateral netting is quite complex, it is co-ordinated by an internal clearing center.
In this typical payment netting program, the clearing center shall institute a pre-arranged timetable where the center will advise each subsidiaries of the net amount to pay or to receive. Often a netting system is integrated with an inter-company short-term financing system. Here, amounts owing to the netting centre by subsidiaries are transferred, say monthly to a group funding account and monitor ed accordingly.
The objective of netting is to reduce the size of the exposure and hedge only the netted amount. The netting will in reality reduce FX transactions and also reduce the float.
The success of netting depends heavily on the cooperation of the participating subsidiaries. Netting is only feasible when there is a high volume of inter-company cross-border trade.
The advantages of netting are:
·   Netting reduces the amount exposed to foreign currency exposure,
·   Banking transfer charges are reduced. Market spreads on the part of the netted transactions are eliminated
·   Central co-ordination of the group’s exposure allows greater management control, including tax planning possibilities.

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