Leading and Lagging
Sound international financial management practices warrant that the rums engaged in international operations should endeavor o have their assets pitta strong currency and liabilities in a weak currency. This may be achieved with the help of the technique now as ‘Reading and. lagging’ (also caned leads and lags) by adjusting the timing of receipts and payments (related to current account transactions) lading, as its ante implies, is raking the lead to collect from foreign currency designated Doris Expeditiously before they are due (when the home currency is expected to strengthen) and to initiate lead to pay foreign currency designated creditors before Beirut due date of payment (when depreciation/devaluation of the home currency is apprehended), Payment 10 creditors on maturity in such a situation will, obviously involve more C3$h outflow of currency as he foreign currency is likely to become costlier. Likewise, when an upward nt of the home currency is expected; early receipts frolic reign currency designated decors will lead to higher home currency receipts. In suasion. Jain as the name implies, is elating receipts from the foreign currency netted receivables whose currencies are likely to appreciate/strengthen and relaying foreign designated payable whose currencies are likely to depreciate devalue weaken.
This financial sense on account f mare receipts from debtors and less. payment. to creditors . Therefore, to receive maximum receipts or make minimum payment, n appreciation-prose . m_NE!, account!S receivables are collected as soon as possible and payment of accounts’ payable is possible, The converse will hold true in depreciation-prone countries; debtors ed as late as possible and creditors are paid s early as possible”. Example 35.8 illustrates gate of follow tog such an approach. . an Indian Company X imports and exports oth 0 and France,Assu~ further Iha.Company US S1 million for its imports after 2 months and is 10 r«eiv~ Ff 8 million,for exports due after 2 currnIspot rates are Rs 47/$ and Rs6.5 OFf.·1t is expected IhatW dollar exchange rate is 0Rs 48 in about z’ months from now. Obviousness reopening paymmt. Company X gains1 will save R~ I per US $ x S$1 million •• Rs 1 mlIlion(total savings). Payment after 1 be ai the rate of Rs 47.5 per US$; the termination exchange ral~ is ased on i·nl~rpoIalion.Ihat ge price of Rs 47 today and Rs 48 after two months);w amount saved will be Re 0.5 x US $1 5.00.000.Tbere is a gain 10 FirmX due 10 lead in making ~arly’payment. . ~ Ff is likely10depreciate 10Rs6.10.2 months from ow; Company will initiatemeasures millionas ~arly as possible, assumingits efforts enable him to collect after a month (based on __ “ICe leChniqu~.the Ff exchange rate is likely 10 be the average of Rs 6.1d, and Rs 6.50 that is, ternis. its value is Rs 6.30 x Ff 8 illion= Rs 50.4 million;~ potential loss saved i.~R~0.20 6.30 – Rs 6.10 Oijc~1yFf rate aft~r IWO months)! multiplied by Ff 8 iUionso Rs 1.6miLLion.