Internal Techniques of Exposure Management and Internal Hedging Strategies and Invoicing

Internal Techniques of Exposure Management

Internal techniques embrace Netting, Matching, Leading and Lagging, pricing policies and Assets and Liability management.

External techniques include forward contracts, borrowings short term, discounting, factorizing, government exchange risk guarantees and currency options.

Internal Hedging Strategies

Hedging device is a firm may be able to reduce or eliminate currency exposure by means of internal strategies or invoicing arrangements like risk sharing between the firms and its foreign customers. We take a look at some of the commonly used or recommended methods.

Invoicing

The firm may be able to shift the entire exchange risk to the other party by invoicing its exports in its home currency and insisting that its imports too be invoiced in its home currency.

Empirically, in a study of the financial structure of foreign trade Grassman (1973) discovered the following regulations:-

Trade between developed countries in manufactured products is generally invoiced in the exporter’s currency.

Trade in primary products and capital assets are generally invoiced in a major vehicle currency such as the USD.

Trade between developed and less developed countries tends to be invoiced on the developed countries currency.

If a country has a higher and more volatile inflation rate then its trading partners, there is a tendency not to use that countries currency in trade invoicing.

Another hedging tool in this context is the use of “Currency Cocktails” for invoicing. Thus for instance, a British importer of chemicals from Switzerland can negotiate with the supplier that the invoice by partly in CHF and party in GBP