A business is having operations in various countries and dealing in various currencies. Describe how "Matching" is used as a tool to hedge against

As described by Kamran Anjum, matching is done by using same currency for payments and receipts, that reduces the risks associated with costs of exchanging currency each time.

• we purchase from same country in which we sell.
• We purchase from a country which is using the same currency what we have as revenues.

The best Answer added by: Kamran Anjum   Head of Internal Audit 2 years ago

Many firms are exposed to foreign exchange risk - i.e. their wealth is affected by movements in exchange rates - and will seek to manage their risk exposure. This page looks at the different types of foreign exchange risk and introduces methods for hedging that risk.

This is the risk of an exchange rate changing between the transaction date and the subsequent settlement date, i.e. it is the gain or loss arising on conversion.

This type of risk is primarily associated with imports and exports. If a company exports goods on credit then it has a figure for debtors in its accounts. The amount it will finally receive depends on the foreign exchange movement from the transaction date to the settlement date.

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. 

Matching – Match Income & Expenses / Receipts & Payments / Assets & Liabilities in the same Currency (Natural v Parallel Matching). For example, say company has income each year in a foreign currency ($’s), then it makes sure it creates an expense / liability in the same currency (say, buys goods from America or borrows money in $’s rather than the home currency and so has an interest expense/liability in $’s) – so as its income goes up and down so also does its expense go up and down in tandem with the same movement in the $ exchange rate.

Netting and Matching are terms that are frequently used inter-changeably, although there are distinctions – strictly speaking netting is a term applied within a group context whereas matching can be applied both intra-group and third-party balancing.

When the time for payment / receipt comes the amount of receivables and payables are netted and balance whether its payable / receivable is settled by paying / receiving the net amount.