ACCA Financial Management (F9) Certification Practice Exam

What approach is utilized for managing foreign currency risks by offsetting receivables and payables?

1. Netting

2. Leading

3. Lagging

4. Spot exchange

The correct answer is: Netting

The approach utilized for managing foreign currency risks by offsetting receivables and payables is netting. This strategy allows businesses to consolidate their foreign currency transactions, which can result in reduced exposure to currency fluctuations. By netting, a company can offset its foreign currency receivables against its payables, effectively reducing the number of transactions that need to be settled in foreign currencies. This process minimizes the amount that has to be converted at current exchange rates, thus decreasing the overall risk associated with currency volatility. Netting is most effective when a company has transactions in multiple currencies and a regular pattern of cash flows. It simplifies cash management, as only the net difference needs to be settled, leading to lower transaction costs and improved hedging efficiency. In contrast, leading and lagging refer to the timing of payments or receipts to take advantage of expected favorable movements in exchange rates, while spot exchange involves the immediate exchange of currencies at the current market rate without any hedging strategies. These approaches do not focus on offsetting the amounts due in a manner that reduces exposure as effectively as netting does.