* Operating and transaction exposures can be partially managed by adopting operating or financing policies that offset anticipated currency exposures * Six of the most commonly employed proactive policies are * Matching currency cash flows * Risk-sharing agreements * Back-to-back or parallel loans * Currency swaps * Leads and lags * Re-invoicing centers * Matching Currency Cash Flows * One way to offset an anticipated continuous long exposure to a particular currency is to acquire debt denominated in that currency * This policy results in a continuous receipt of payment and a continuous outflow in the same currency * This can sometimes occur through the conduct of regular operations and is referred to as a natural hedge

Matching: Debt Financing as a Financial Hedge

Currency Clauses: Risk-sharing * Risk-sharing is a contractual arrangement in which the buyer and seller agree to “share” or split currency movement impacts on payments * Example: Ford purchases from Mazda in Japanese yen at the current spot rate as long as the spot rate is between ¥115/$ and ¥125/$. * If the spot rate falls outside of this range, Ford and Mazda will share the difference equally * If on the date of invoice, the spot rate is ¥110/$, then Mazda would agree to accept a total payment which would result from the difference of ¥115/$- ¥110/$
(i.e. ¥5)

* Ford’s payment to Mazda would therefore be

* Note that this movement is in Ford’s favor, however if the yen depreciated to ¥130/$ Mazda would be the beneficiary of the risk-sharing agreement * Back-to-Back Loans * A back-to-back loan, also referred to as a parallel loan or credit swap, occurs when two firms in different countries arrange to borrow each other’s currency for a specific period of time * The operation is conducted outside