Glossar

Foreign exchange netting involves offsetting accounts receivable/payables in one currency with accounts payable/receivable in the same currency. When currency rates move, FX gains (losses) on one position should then be offset by FX losses (gains) on the other. There are more possibilities yet. If the exchange rate movements of two currencies are positively correlated, a long position in one currency can offset a short position in the other. If the exchange rate movements of two currencies are negatively correlated, a long (short) position in one currency can offset a short (long) position in the other. The aim of foreign exchange netting is to manage currency exposures on a portfolio basis and to save on hedging costs, as only the resulting net exposures are hedged with forward contracts.