It may not be uncommon among international companies to have mutual trading among themselves like multinational companies. Foreign exchange risk exposure of such companies can be ‘!lib~antisocially reduced if foreign designated receivables and payments among them are settled on be 111.’balance basis (known 3 nc ling) instead of making two way flows of money of receiving and another of paying. To have such a netting, it is important that the dates ‘of settlement should match and the foreign currency involved should he the same for receipts and payments that are due. . Since the risk exposure L hedged for goth parties, hey try to match the maturity dates and currencies of sums receivable and payable between themselves.
Types of Nettle
Netting L of two types, namely, bilateral and multilateral, While netting involving two parties is referred to as bilateral, netting with more than two parties L~ called multilateral. Multilateral netting is practiced among multinational corporations having subsidiaries whereas, bilateral netting is feasible between any two transacting companies Lateral Settler Suppose Company X exports goods to Company Y for US S million and ExpOrts goods worth US $1.5 million from Company Y. Their dates of maturity re the same. Figure 35.1 slows the movement of funds between these two companies. The movement of funds with netting exhibited in Figure 35.2.
absence of petting. the tow exposure of the two companies is US $3.5 million (Figure 35.1); sure is reduced substantially to the net um of US $0.5 mi!million, payable by Y to X. As stated above, multilateral netting involves netting of risk exposure among XXXIII julius 0 companies. Normally such resetting practiced among a parent company and its Figure 35.3 depicts the normal movement f funds between a parent company (P) subsidiaries netting.