Which internal hedging technique matches receipts to reduce the amount that needs to be converted?

• A. Matching
• B. Lagging
• C. Invoicing in home currency
• D. Leading

Answer: (A)

Internal hedging can reduce the amount that needs to be converted by netting cash flows in the same foreign currency. When a receipt in a foreign currency and a payable in that same currency can be matched, the two are settled internally, leaving only the net amount to convert. For example, if a subsidiary expects to receive 100,000 USD and also has a 60,000 USD payable, netting would mean only 40,000 USD needs to be exchanged, reducing both the exposure and the costs of currency conversion. The other techniques work differently: leading and lagging adjust the timing of payments to take advantage of expected FX movements, while invoicing in home currency shifts the currency risk to others rather than netting cash flows within the firm. Matching is the direct way to minimize external conversions by aligning inflows and outflows in the same currency.