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We have earlier discussed the internal hedging method of Netting method.

Let’s move to the final part of the article on the internal hedging method:

Inter-Company Foreign Exchange Contracts
Forward contracts raised between two within group companies where one company agrees to buy or sell currency to the other at a specified future date at a specified rate of exchange.
The modus operandi is as follows:

• Where a holding company wishes to centralize FX exposure, so it offers its subsidiaries a forward contract. This has the effect of transferring exposure to the centre and covering the subsidiary’s transaction. This produces an internal hedge for the subsidiary but an open position for the parent company to hedge externally.

The advantages are as follows:

• It allows a better managed central control of exposed exchange positions
• Local management are relieved of the burden of covering exposed positions by passing the decision to the centre who can either leave the position open or cover it on the foreign exchange market.
• If there is a clearing centre, it might act as a profit centre as it has more flexibility in negotiating the deal separately unlike those of the netting or matching series of transactions.

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Related Entries

• Foreign Exchange Management: Before Even We Consider Hedging Strategy
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