The process of combining contracts involving the same beneficiary to find a value which will reduce the amounts sent between each other, therefore saving money on the foreign exchange costs.
For instance, if Company A owes $80,000 to Company B and Company B owes $70,000 to Company A, they can set a netting value of $10,000 (that Company A owes to Company B).
Foreign currency netting, also known as cash pooling is a common form of netting. Multinationals with subsidiaries in other countries might need to conduct frequent foreign exchange transactions between subsidiaries and the parent company. This is also known as Intercompany Netting (IC Netting).
There are three advantages to reducing the volume of foreign payments:
- Less money in transit means more money available for investment
- Fewer foreign currency payments mean reduced transaction risk
- A reduction in the commission paid on foreign exchange transactions
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