# Matching and Netting Agreements

Netting and matching are a feature of foreign exchange risk management and are carried out to reduce the scale of external hedging required.

For example, Group X is expecting to receive \$10 million in one subsidiary and pay \$6 million at the same time in another subsidiary. Clearly the group only has a net exposure of a receipt of \$4 million.

The terms 'netting' and 'matching' are often used interchangeably but strictly speaking they are different:

• Netting refers to netting off group receipts and payments, as in the example above.
• Matching extends this concept to include third parties such as external suppliers and customers.

Normally netting/matching only occurs in one currency at a time - in the above example \$ were matched against \$. However, if an agreement exists to do so, groups can also match different currencies against each other. This is the topic of this page.

### Calculations

The calculations can be presented in one of two ways: the tabular method and the diagrammatical method. Both are explained below.

#### Tabular method

Step 1: Set up a table with the name of each company down the side and across the top.

Step 2: Input all the amounts owing from one company to another into the table and convert them into a common (base) currency (at spot rate).

Step 3: By adding across and down the table, identify the total amount payable and the total amount receivable by each company.

Step 4: Compute the net payable or receivable, and convert back into the original currency.

#### Diagrammatical method

Step 1: Convert all currency flows to a common (base) currency using spot rates (NOT forward or future rates).

Step 2: Clear the overlap of any bi-lateral indebtedness.

E.g.

Step 3: Clear the smallest leg of any 3 way circuits.

E.g.

Step 4: Clear the smallest leg of any 4 way circuits (then 5, etc).

E.g.

Step 5: Convert back into original currencies.

Step 6: Use the simplified figures for:

A Settlement

B Setting up appropriate hedging tools.

 Created at 9/12/2012 10:43 AM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London Last modified at 11/13/2012 3:39 PM  by System Account  (GMT) Greenwich Mean Time : Dublin, Edinburgh, Lisbon, London

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### Tags:

 netting;matching;foreign exchange risk

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