Which technique is an external hedging method?

Which technique is an external hedging method?

• A. Forward exchange contracts
• B. Fiscal hedging
• C. Credit hedging
• D. Invoicing in home currency

Answer: (D)

Shifting currency risk to the other party by invoicing in the home currency. When you bill in your own currency, the amount you receive is not exposed to future exchange-rate movements, so the firm lowers its foreign-exchange risk. This relies on a contractual arrangement with an external party (the customer), which is why it’s considered an external hedging method. By contrast, forward contracts are market instruments used to lock rates with a counterparty, fiscal hedging relates to policy tools, and credit hedging covers counterparty credit risk rather than currency exposure.

Shifting currency risk to the other party by invoicing in the home currency. When you bill in your own currency, the amount you receive is not exposed to future exchange-rate movements, so the firm lowers its foreign-exchange risk. This relies on a contractual arrangement with an external party (the customer), which is why it’s considered an external hedging method. By contrast, forward contracts are market instruments used to lock rates with a counterparty, fiscal hedging relates to policy tools, and credit hedging covers counterparty credit risk rather than currency exposure.