LEADING AND LAGGING
It refers to the adjustment of the times of payments that are made in foreign currencies. Leading is the payment of an obligation before due date while lagging is delaying the payment of an obligation past due date. The purpose of these techniques is for the company to take advantage of expected devaluation or revaluation of the appropriate currencies. Lead and lag payments are particularly useful when forward contracts are not possible.
It is more attractive to use for the payments between associate companies within a group. Leading and lagging are aggressive foreign exchange management tactics designed to take the advantage of expected exchange rate changes. Buckley (1988) supports the argument with the following example:
Subsidiary b in B country owes money to subsidiary a in country A with payment due in three monthsí time and with the debt denominated in US dollar. On the other side, country Bís currency is expected to devalue within three months against US dollar moreover vis-ŗ-vis country Aís currency. Under these circumstances, if company b leads -pays early - it will have to part with less of country Bís currency to buy US dollar to make payment to company A. Therefore, lead is attractive for the company. When we take reverse the example-revaluation expectation, it could be attractive for the lagging.
On the other hand, in case of lagging payment to an independent third party, there is always the possibility of upsetting the trading relationship, with possible loss of credit facilities or having prices increased to compensate for the delay in the receipt of funds. There is also the possibility of damage to the lagging companyís external credit rating.