In internal hedging, invoicing in home currency passes FX risk to the customer.

In internal hedging, invoicing in home currency passes FX risk to the customer.

• A. It eliminates FX risk
• B. It passes risk to supplier
• C. It passes risk to customer
• D. It is only used for external hedging

Answer: (C)

The key idea is how invoicing currency in internal hedging shifts currency risk within a corporate group. When intercompany transactions are invoiced in the home currency, the entity receiving the invoice must convert that amount into its own functional currency to settle. That means the FX rate movements affect the recipient’s costs or revenues, so the currency risk is borne by the internal customer rather than the payer. In practice, the parent company reduces its own exposure by charging in its own currency, but the subsidiary or internal customer faces the fluctuations when converting to its local currency. This reallocation within the group is the essence of internal hedging, not a true reduction of risk for the group as a whole.

The key idea is how invoicing currency in internal hedging shifts currency risk within a corporate group. When intercompany transactions are invoiced in the home currency, the entity receiving the invoice must convert that amount into its own functional currency to settle. That means the FX rate movements affect the recipient’s costs or revenues, so the currency risk is borne by the internal customer rather than the payer. In practice, the parent company reduces its own exposure by charging in its own currency, but the subsidiary or internal customer faces the fluctuations when converting to its local currency. This reallocation within the group is the essence of internal hedging, not a true reduction of risk for the group as a whole.