Trade Finance, Payments and Foreign Exchange

Introduction and Context

International trade separates the physical movement of goods from the movement of money. An exporter may dispatch goods weeks before receiving payment, while an importer may be required to pay before receiving and inspecting them. Distance, legal differences, political risk, unfamiliar counterparties, documentation requirements, and currency volatility therefore create financing and risk-management problems that do not arise, or arise less severely, in domestic transactions.

Trade finance addresses these problems through payment arrangements, bank intermediation, credit insurance, working-capital facilities, and foreign-exchange instruments. The central managerial task is not simply to select the instrument with the greatest payment security. It is to balance security, cost, speed, liquidity, bargaining power, customer expectations, and operational complexity.

This chapter compares the four principal settlement methods—advance payment, open account, documentary collection, and letters of credit—then examines documentary-credit rules, working-capital and export-credit solutions, and counterparty, documentary, and currency exposure.

Learning Objectives

By the end of this chapter, students should be able to:

1. Compare the risk allocation and commercial suitability of major international payment methods.
2. Explain the independence principle, strict compliance, and other important principles associated with documentary credits under UCP 600.
3. Evaluate working-capital, export-credit, insurance, and supply-chain-finance alternatives.
4. Calculate basic foreign-exchange exposures and hedge outcomes.
5. Design controls for counterparty, documentary, sanctions, fraud, and currency risk.
6. Critically assess the trade-offs between payment security, cost, liquidity, and customer competitiveness.

1. The Economic Logic of Trade Finance

Trade finance performs three related functions:

• Payment assurance: increasing the probability that the seller is paid and that the buyer receives conforming documents or goods.
• Liquidity transformation: funding production, shipment, receivables, or inventory during the cash-conversion cycle.
• Risk allocation: transferring or sharing commercial, political, documentary, and currency risks among buyers, sellers, banks, insurers, and public agencies.

A useful starting point is the cash-conversion cycle:

Here, DIO is days inventory outstanding, DSO is days sales outstanding, and DPO is days payable outstanding. The result is measured in days and assumes that the measures are calculated consistently, usually using average inventory, receivables, and payables. A longer export production or transit period increases the seller’s funding requirement; extended payment terms increase receivables and therefore working-capital needs.

If daily cash operating cost is C and the additional financing period is n days, a simple approximation of incremental operating funding is:

This is a planning approximation, not a complete cash-flow model. It excludes financing costs, taxes, seasonality, exchange-rate movements, inventory valuation effects, and non-cash expenses.

Trade finance decisions should therefore be integrated with sales contracts, logistics planning, treasury policy, credit management, and compliance—not delegated solely to a bank or accounts-payable department.

2. The Four Principal Payment Methods

2.1 Advance Payment

Under advance payment, the importer pays before the exporter ships, either in full or through a deposit and balance arrangement. The method gives the exporter maximum payment protection and immediate liquidity, while exposing the importer to non-delivery, late delivery, quality failure, and recovery risk.

Advance payment is commercially plausible when the exporter has strong bargaining power, the product is customized, the importer is new or weakly creditworthy, production requires substantial working capital, or the market is subject to severe political or transfer risk. It may also be used for a first order before a relationship is established.

Risk controls for the importer include staged payments, performance guarantees, inspection rights, retention amounts, milestone billing, and cancellation or refund clauses. For the exporter, advance payment reduces receivables but may reduce competitiveness because buyers often prefer credit terms.

2.2 Open Account

Under open account, the exporter ships first and invoices the importer, who pays on an agreed future date—for example, 30, 60, or 90 days after shipment or invoice. This is attractive to buyers because it provides operating liquidity and an opportunity to sell or use the goods before payment. It is attractive to established exporters seeking customer retention, but it places substantial commercial and financing risk on the seller.

The exporter’s exposure includes buyer default, delayed payment, insolvency, country restrictions on currency transfer, and the cost of financing receivables. Mitigation may include credit limits, advance deposits, retention-of-title provisions where enforceable, credit insurance, factoring, forfaiting, receivables discounting, parent guarantees, and political-risk insurance.

Open account should not be confused with an unconditional absence of controls. A disciplined exporter establishes a documented credit policy, obtains current financial and trade information, monitors overdue balances, and suspends shipments when limits are exceeded.

2.3 Documentary Collection

A documentary collection uses banks to transmit commercial and/or transport documents and to collect payment or acceptance, but the banks generally do not undertake the buyer’s payment obligation. The exporter’s bank is the remitting bank; the importer’s bank is the collecting or presenting bank.

The two main structures are:

• Documents against payment (D/P): documents are released only against immediate payment.
• Documents against acceptance (D/A): documents are released against the importer’s acceptance of a time draft or other undertaking to pay at a future date.

Collections are cheaper and less procedurally demanding than letters of credit, but they provide less payment certainty. Under D/P, the buyer may refuse documents, leaving the exporter with goods in transit, storage costs, resale difficulties, or disposal problems. Under D/A, the buyer may obtain control of the goods before maturity and subsequently default.

The exporter should examine whether the transport document gives the buyer control of the goods, whether the goods are readily resalable, who bears demurrage and storage costs, and what the banks’ instructions require. The Uniform Rules for Collections (URC 522) may be incorporated by contract, but the parties must identify the applicable rules clearly.

2.4 Letters of Credit

A documentary letter of credit (LC) is a bank undertaking to pay the beneficiary—normally the exporter—against presentation of documents that comply with the credit’s terms. It substitutes, to a degree, the issuing bank’s creditworthiness for that of the buyer. A confirmed credit adds the undertaking of a second bank, usually in the exporter’s country, thereby reducing issuing-bank and country risk.

Important distinctions include:

• Irrevocable credit: under modern standard practice, a credit cannot be amended or cancelled without the required consent of the relevant parties.
• Sight credit: payment is due upon complying presentation and completion of examination procedures.
• Usance or deferred-payment credit: payment occurs at a stated future date.
• Confirmed credit: a confirming bank adds its own independent undertaking.
• Transferable credit: a credit expressly designated transferable may be transferred under applicable rules; it is not automatically transferable.
• Revolving credit: availability renews according to stated terms, useful for recurring shipments.

An LC does not guarantee that the goods are physically satisfactory. Banks deal with documents, not goods, services, or performance. The sales contract and the credit are separate instruments, and a dispute over defective goods may not prevent payment if the presented documents comply.

Comparative Evaluation

No method is universally superior. Payment terms are a negotiated allocation of risk and financing benefit. A buyer may accept an LC in return for a lower price; an exporter may offer open account only within a credit-insurance limit.

3. Documentary Credits and UCP 600 Principles

The International Chamber of Commerce’s UCP 600 is a widely used set of rules for documentary credits. It applies when the credit expressly states that it is subject to UCP 600. It is not a statute and does not automatically govern every LC.

Independence Principle

The credit is separate from the underlying sales contract. Banks are not concerned with disputes about whether goods conform to the contract when examining documents under the credit. This principle supports certainty in payment but can produce harsh outcomes where documents comply and goods do not.

Banks Deal with Documents

Banks examine stipulated documents rather than inspecting goods, services, or performance. Consequently, the credit must specify commercially necessary documents without imposing vague, unnecessary, or impossible requirements.

Strict Compliance and Standard Examination

A presentation must comply with the credit, UCP 600, and applicable international standard banking practice. “Strict compliance” does not mean that every typographical difference automatically causes refusal; the test is whether the presentation complies with the credit and governing rules. Banks generally have a maximum of five banking days following presentation to determine whether a presentation complies, subject to the rules and facts of the transaction.

Common discrepancies include:

• late shipment or late presentation;
• inconsistent names, quantities, marks, or addresses;
• missing signatures, endorsements, or originals;
• an incorrect transport document;
• insurance that does not meet the required coverage or amount;
• description differences that create uncertainty;
• documents presented after expiry or at the wrong place.

The exporter should create a document matrix before shipment, allocate responsibility for each document, and conduct a pre-presentation review. The importer should avoid excessive requirements and ensure that the credit accurately reflects the commercial contract.

Issuing, Advising, Nominated, and Confirming Banks

The issuing bank issues the credit at the applicant’s request. The advising bank authenticates and communicates the credit but does not necessarily assume a payment obligation. A nominated bank may be authorized to pay, incur a deferred-payment undertaking, or accept drafts; nomination alone does not necessarily require the bank to pay. A confirming bank adds its own undertaking in addition to that of the issuing bank.

Amendments and Refusal

An amendment generally requires the consent of the parties whose rights are affected. Exporters should not ship while relying on an unaccepted amendment. If a bank determines that a presentation is discrepant, it must follow the applicable notice requirements. Parties should distinguish a genuine documentary discrepancy from a commercial disagreement and should not assume that a waiver request guarantees payment.

4. Working-Capital and Export-Credit Solutions

Bank Facilities

Common facilities include pre-shipment working-capital loans, post-shipment finance, overdrafts, revolving credit lines, borrowing-base facilities, and receivables discounting. Pre-shipment finance funds materials, labor, and production. Post-shipment finance bridges the period between dispatch and collection.

A simple interest estimate is:

The day-count basis may be 360 or 365, depending on the agreement and market convention. The rate must be expressed as a decimal, and the period and day-count convention must be consistent.

For example, financing of $500,000 at 8% per year for 90 days on a 360-day basis costs:

500,000 × 0.08 × 90 ÷ 360 = $10,000.

This is the interest cost only; fees, commitment charges, insurance, and hedging costs may increase the total cost.

Factoring and Forfaiting

Factoring generally concerns short-term receivables and may include administration, collection, financing, and credit protection. It can be disclosed or undisclosed and recourse or non-recourse, subject to the agreement. Non-recourse factoring transfers specified credit risk but usually costs more and does not necessarily transfer every dispute or performance risk.

Forfaiting typically finances medium-term receivables, often evidenced by bills of exchange or promissory notes, on a without-recourse basis. It is useful for capital goods and deferred-payment exports, but pricing depends on tenor, obligor, country risk, currency, and the quality of payment instruments or guarantees.

Export Credit Agencies and Insurance

Export credit agencies (ECAs) and private insurers may provide working-capital guarantees, buyer credit, supplier credit, export receivables insurance, political-risk cover, or investment support. Coverage may address commercial non-payment, political events, currency inconvertibility, transfer restrictions, war, or government action, but exclusions, deductibles, waiting periods, disclosure duties, and claims procedures are critical.

Insurance does not remove the need for credit assessment. A policy may exclude disputes caused by defective goods, late shipment, sanctions violations, or failure to comply with approved credit limits. Managers must read the policy rather than treat “insured” as synonymous with “risk-free.”

Supply-Chain Finance

In approved-payables finance, a bank or platform pays a supplier early, often at a rate linked to the buyer’s credit quality, while the buyer pays the financier at maturity. This can reduce supplier financing costs and extend buyer payment terms. It can also create dependence on a buyer’s program, obscure economic leverage, and produce accounting, disclosure, concentration, or resilience concerns. Programs should be transparent and should not coerce vulnerable suppliers into uneconomic pricing.

5. Foreign-Exchange Exposure and Hedging

Foreign-exchange risk arises when the value of a cash flow changes because the exchange rate changes. Three useful classifications are:

1. Transaction exposure: a contracted foreign-currency receivable or payable.
2. Translation exposure: accounting effects from consolidating foreign operations.
3. Economic exposure: the longer-term effect of exchange rates on competitiveness, prices, and future cash flows.

If a company will receive foreign currency amount F and the domestic-currency value of one unit of foreign currency is S, then:

The quotation convention must be stated. If S is domestic currency per unit of foreign currency, an increase in S benefits an exporter receiving foreign currency but raises the domestic cost of a foreign-currency payable.

Worked Foreign-Exchange Example

An exporter expects to receive €1,000,000 in 90 days. The current forward rate is $1.08/€. The exporter sells euros forward at that rate. The contractual dollar proceeds are:

€1,000,000 × $1.08/€ = $1,080,000.

If the spot rate in 90 days is $1.02/€, an unhedged receipt would be worth $1,020,000. The forward hedge therefore provides $60,000 more than the hypothetical unhedged outcome at that future spot rate. If the future spot rate is $1.14/€, the unhedged receipt would be $1,140,000, so the exporter gives up $60,000 of favorable upside in exchange for certainty. This comparison ignores forward points, transaction costs, credit adjustments, and any mismatch between the forecast and actual receipt.

Hedging Instruments

• Forward contracts: fix an exchange rate for a future purchase or sale of currency. They provide certainty but create an obligation and may generate replacement cost if the underlying transaction disappears.
• Currency options: provide a right, but not an obligation, to buy or sell currency at a specified strike price. The buyer pays a premium and retains beneficial movement beyond the protected level.
• Currency swaps: exchange cash flows in different currencies, usually for longer-term funding or structural exposures.
• Natural hedges: match foreign-currency revenues with costs, debt service, or supplier payments in the same currency.
• Leading and lagging: adjust payment timing within contractual and ethical limits; this can reduce exposure but may affect relationships and working capital.

Hedges should be linked to documented exposures. Over-hedging forecast sales, using derivatives for speculation, or ignoring settlement and collateral requirements can create new risks. Treasury policies should specify authorized instruments, counterparties, hedge ratios, maturity limits, valuation procedures, and escalation rules.

6. Integrated Risk Management

Counterparty Risk

Counterparty assessment should combine financial analysis, payment history, ownership, sanctions screening, country conditions, bank references, beneficial-ownership checks, and transaction-specific information. Credit limits should reflect expected exposure, not merely invoice value. For a deferred receivable, exposure may include principal, accrued charges, replacement cost, and collection expense.

Risk responses include deposits, guarantees, standby letters of credit, confirmed documentary credits, credit insurance, shorter terms, diversified customers, and shipment holds. A bank’s involvement does not automatically eliminate buyer risk unless the bank has assumed a clear payment obligation.

Documentary Risk

Documentary risk is the possibility that a payment or customs process fails because documents are absent, inconsistent, late, unauthenticated, or non-compliant. Controls include:

• a contract-to-document requirements matrix;
• a single controlled version of shipping instructions;
• maker-checker review;
• automated validation of names, dates, quantities, and currency;
• segregation of duties between shipment authorization and document release;
• secure verification of bank-account changes;
• retention of evidence and audit trails.

Digital trade documents and electronic bills of lading can reduce delay and duplicate-document fraud, but legal recognition differs across jurisdictions. Cybersecurity, identity management, interoperability, and evidentiary reliability remain essential.

Fraud, Sanctions, and Compliance

Trade-based money laundering may involve over-invoicing, under-invoicing, phantom shipments, multiple invoicing, misdescription, or complex routing. Sanctions screening must cover parties, vessels, banks, goods, destinations, and beneficial owners as relevant. Export controls may apply to dual-use goods and technology even where the commercial customer appears legitimate.

A compliant transaction can still be commercially unwise, while an attractive transaction can be legally prohibited. Organizations need escalation procedures, trained personnel, independent review, transaction monitoring, and a documented decision to stop or investigate suspicious activity. Artificial intelligence can assist anomaly detection and document comparison, but human accountability remains necessary because models may produce false positives, miss novel schemes, or reproduce biased data patterns.

7. Decision Framework for Selecting Payment Terms

Managers can evaluate a proposed transaction through six questions:

1. How strong are the buyer’s credit, integrity, and payment history?
2. What are the country, transfer, sanctions, and political risks?
3. Does the exporter need pre-shipment or post-shipment funding?
4. Can the goods be recovered, redirected, or resold if payment fails?
5. How much documentary precision and bank intermediation is justified?
6. What currency and maturity exposures remain after selecting the payment method?

A practical structure is to begin with a target risk allocation and then negotiate the least costly instrument that achieves it. For example, an exporter may use open account for low-risk repeat buyers within insured limits, D/P for moderate-risk buyers of readily resalable goods, and a confirmed LC for a new buyer in a high-risk market. Payment terms can be graduated by customer segment rather than applied uniformly.

8. Illustrative Case: Meridian Components

Background

Meridian Components, a fictional manufacturer in the United States, receives an order worth €2 million from Atlas Mobility, a new distributor in a country with moderate political and transfer risk. The goods are customized and require four months of production. Atlas requests 90-day open-account terms after shipment. Meridian’s production bank will finance only 70% of eligible receivables and has no prior experience with Atlas’s country.

Problem

Meridian faces buyer default, country-transfer, documentary, liquidity, and euro-dollar exposure. Refusing all credit may lose a strategically important customer; accepting unsecured open account may exceed Meridian’s risk appetite.

Analysis

The customized goods have limited resale value, so D/P does not fully protect Meridian if Atlas refuses documents. A standard LC would provide an issuing-bank undertaking, but the country risk and issuing-bank quality require assessment. A confirmed LC would add cost but improve payment assurance. Meridian also needs pre-shipment funding and must decide whether to hedge the euro receipt.

Approach and Solution

Meridian negotiates a confirmed irrevocable LC subject to UCP 600, payable 60 days after a complying presentation. Atlas pays a 20% advance, reducing Meridian’s funding requirement. The credit specifies only necessary documents: commercial invoice, packing list, transport document, certificate of origin where required, and an inspection certificate issued by an independent party. Meridian’s bank confirms the LC after assessing the issuing bank and country exposure.

Meridian creates a document matrix, performs a pre-shipment compliance review, and obtains a forward contract for 80% of the expected euro receipt. The remaining 20% is left partly unhedged because the final shipment value may vary. The treasury policy records the hedge designation, maturity, counterparty limit, and treatment if the order is cancelled.

Outcome

The advance reduces working-capital pressure; confirmation reduces issuing-bank and country risk; simplified documentary requirements reduce discrepancy risk; and partial hedging protects most expected dollar proceeds without forcing Meridian to hedge an uncertain amount fully. Meridian prices the confirmation, financing, inspection, and hedge costs into its quotation.

Learning Points

The case demonstrates that payment choice, financing, documentation, and foreign exchange cannot be optimized independently. The strongest instrument is not necessarily the cheapest, and a bank undertaking is valuable only when its terms, issuing institution, confirmation, and documentary requirements are understood.

9. Limitations and Contemporary Developments

Trade-finance instruments reduce selected risks but cannot eliminate operational failure, fraud, quality disputes, sanctions exposure, or market volatility. Rules such as UCP 600 create an agreed framework, not an unconditional guarantee of commercial success. Legal outcomes may depend on governing law, insolvency rules, electronic-transactions legislation, and court interpretation.

Digitization is expanding through electronic bills of lading, distributed ledgers, application programming interfaces, automated document checking, and data-based credit assessment. The benefits include faster processing, fewer manual errors, and better traceability. Limitations include fragmented standards, data-quality problems, cyber risk, legal uncertainty, and the danger that automation will approve a formally consistent but economically suspicious transaction.

Best practice is therefore a combination of contractual clarity, bank and insurer selection, disciplined credit controls, documentary expertise, treasury governance, compliance oversight, and continuous review of actual exposure.

Chapter Summary

International payment methods allocate risk and liquidity differently. Advance payment protects the exporter but burdens the importer. Open account supports the buyer and sales competitiveness but exposes the exporter to credit and country risk. Documentary collections provide bank-mediated document handling without a general bank payment guarantee. Letters of credit provide an independent bank undertaking when documents comply, but they involve cost, complexity, and documentary risk.

UCP 600 emphasizes independence, documentary examination, and compliance with the credit and applicable banking practice. Banks do not guarantee the physical quality of goods. Working-capital tools include bank finance, receivables finance, factoring, forfaiting, export credit, insurance, and supply-chain finance. Each transfers particular risks subject to eligibility rules, exclusions, and cost.

Foreign-exchange exposure may be managed through forwards, options, swaps, natural hedges, and timing decisions. Effective governance links instruments to genuine exposures and establishes limits, authorization, valuation, compliance, and contingency procedures. Sound trade-finance management integrates payment security, liquidity, documentation, counterparty assessment, sanctions controls, and currency strategy.

Key Terms

Advance payment: Payment made by the importer before shipment or performance.

Open account: Shipment or performance occurs before payment is due.

Documentary collection: Bank-mediated transfer of documents with instructions to obtain payment or acceptance.

D/P: Documents against payment.

D/A: Documents against acceptance.

Letter of credit: A bank undertaking to pay against a complying presentation of stipulated documents.

Applicant: The party, normally the importer, requesting issuance of a documentary credit.

Beneficiary: The party entitled to draw under a documentary credit, normally the exporter.

Issuing bank: The bank that issues the documentary credit.

Advising bank: The bank that authenticates and advises the credit to the beneficiary.

Confirming bank: A bank that adds its own undertaking to that of the issuing bank.

UCP 600: ICC rules commonly incorporated into documentary-credit transactions.

Complying presentation: Documents that satisfy the credit, applicable rules, and standard banking practice.

Factoring: Financing and/or administration of usually short-term receivables.

Forfaiting: Usually non-recourse purchase or financing of medium-term trade receivables.

Export credit agency: A public or publicly supported institution that facilitates or insures exports.

Transaction exposure: Risk arising from contracted foreign-currency cash flows.

Natural hedge: Matching foreign-currency inflows with outflows or liabilities.

Supply-chain finance: Financing that uses the credit quality or approved-payables process of supply-chain participants.

Trade-based money laundering: Use of trade transactions to move or disguise illicit funds.

Review Questions

5 Short Answer Questions

1. Why does open-account trade usually favor the importer’s liquidity position?
2. Distinguish D/P from D/A documentary collection.
3. What does the independence principle mean in a documentary credit?
4. Identify two common documentary discrepancies under an LC.
5. Distinguish transaction exposure from economic exposure.

5 Long Answer Questions

1. Compare advance payment, open account, documentary collection, and letters of credit from the perspectives of both exporter and importer.
2. Explain the roles of the issuing, advising, nominated, and confirming banks.
3. Evaluate the benefits and limitations of factoring, forfaiting, export-credit insurance, and supply-chain finance.
4. Discuss how UCP 600 changes the management of documentary risk without guaranteeing product quality.
5. Design a governance framework for an exporter’s foreign-exchange hedging program.

3 Analytical / Application Questions

1. An exporter of customized machinery is considering D/P, open account, and a confirmed LC for a first-time buyer in a politically uncertain market. Which method would you recommend, and what additional contractual and operational controls would you require?
2. A company expects to receive €750,000 in 120 days and has a forward rate of $1.10/€. Analyze the advantages and disadvantages of hedging 100%, 70%, or none of the exposure.
3. A documentary credit requires a transport document, insurance document, certificate of origin, and inspection certificate. Develop a document-control process that reduces discrepancy, fraud, and sanctions risks while preserving shipment speed.

Multiple Choice Questions with Answers

Question 1

Which payment method generally gives the exporter the greatest payment protection before shipment?

A. Open account

B. Advance payment

C. Documents against acceptance

D. Unconfirmed documentary collection

Correct Answer: B. Advance payment

Question 2

Under documents against acceptance, the importer normally receives documents after:

A. Paying the invoice immediately

B. Providing an accepted time undertaking

C. The exporter waives all claims

D. The confirming bank pays in advance

Correct Answer: B. Providing an accepted time undertaking

Question 3

What is the central effect of the independence principle in a documentary credit?

A. The bank must inspect the physical goods

B. The credit depends automatically on the sales contract

C. The credit is separate from the underlying sales contract

D. The importer can cancel payment for any quality complaint

Correct Answer: C. The credit is separate from the underlying sales contract

Question 4

Which bank adds its own undertaking to that of the issuing bank?

A. Advising bank

B. Collecting bank

C. Confirming bank

D. Remitting bank

Correct Answer: C. Confirming bank

Question 5

A company finances $500,000 at 8% annually for 90 days using a 360-day convention. What is the simple interest cost?

A. $8,000

B. $9,000

C. $10,000

D. $12,000

Correct Answer: C. $10,000

Question 6

An exporter receives €1,000,000 and the applicable rate is $1.08 per euro. What is the dollar value?

A. $925,926

B. $1,000,000

C. $1,080,000

D. $1,180,000

Correct Answer: C. $1,080,000

Question 7

Which instrument normally gives the buyer a right, but not an obligation, to exchange currency at a specified rate?

A. Forward contract

B. Currency option

C. Trade acceptance

D. Documentary collection

Correct Answer: B. Currency option

Question 8

Which statement about banks and documentary credits is most accurate?

A. Banks guarantee that goods meet the buyer’s expectations

B. Banks generally examine stipulated documents rather than goods

C. Banks always pay despite discrepancies

D. Banks replace the sales contract entirely

Correct Answer: B. Banks generally examine stipulated documents rather than goods

Question 9

Which exposure concerns the effect of exchange rates on future competitiveness and cash flows?

A. Economic exposure

B. Documentary exposure

C. Settlement exposure only

D. Presentation exposure

Correct Answer: A. Economic exposure

Question 10

What is a principal risk of over-hedging a forecast export receipt?

A. The exporter is guaranteed a higher spot-market gain

B. The hedge may exceed the actual underlying exposure

C. The exporter eliminates all documentation requirements

D. The buyer automatically assumes currency risk

Correct Answer: B. The hedge may exceed the actual underlying exposure