A question from Yahoo! Answers:
I need a little help with my business homework. The question is: How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value?
I wasn’t sure whether to post this in business and finance or economics, if I should post elsewhere, let me know.
So, it is my (limited) understanding that exposure netting can happen in two circumstances, currency groups or the pairing of a strong and a weak currency. The above, I believe, would be the situation of a currency group. Right? So, now…how do I elaborate? Or how would you?
How would you accomplish exposure netting with currencies to two countries that tend to go up and down together in value? Simple: the aggregate exposure to two currencies should be close to zero. Say, you have $100 million worth of long exposure (say, receivables) to currency A and $60 million worth of short exposure (say, payables) to currency B. In this situation, your aggregate exposure to two currencies is long $40 million. To offset this, you need a $40 million short exposure to one or both of those currencies. You can acquire this exposure by selling one or both of those currencies forward, by incurring additional payables in one or both of those currencies, or by taking out a loan in one or both of those currencies.