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  • WTO launches new edition of Handbook on the TRIPS Agreement November 27, 2020
    The WTO launched today (27 November) the second edition of “A Handbook on the WTO TRIPS Agreement”, which describes the historical and legal background to the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS), its role in the organization and its institutional framework. The publication coincides with the 25th anniversary of the entry into […]
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  • WTO to host first Trade for Peace Week November 25, 2020
    The WTO will host the first edition of the Trade for Peace Week from 30 November to 4 December 2020. Ten virtual panel sessions will explore the nexus between trade and peace, with the focus on fragile and conflict-affected countries in accession which want to use trade and economic integration to promote sustainable and inclusive […]
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  • DDG Agah at ITC Joint Advisory Group: Open trade and economic inclusion key to post-COVID recovery November 25, 2020
    In remarks on 25 November to the 54th session of the Joint Advisory Group that oversees the work of the International Trade Centre (ITC), WTO Deputy Director-General Yonov Frederick Agah argued that open international trade, together with efforts to ensure the benefits from economic activity are widely shared, would be necessary to repair the social […]
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  • DDG Wolff: “WTO reform is both necessary and feasible” November 24, 2020
    Speaking at the “1+6” roundtable meeting presided by Chinese Premier Li Keqiang on 24 November, Deputy Director-General Alan Wolff urged WTO members to begin serious engagement on improving the WTO, arguing there was enough common ground to reach major new agreements. He also called on China to participate actively and contribute positively to planning far-reaching […]
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Leads and Lags



leads and lags

 

The Leads and Lags method consists in advancing or postponing the payment date in order to benefit from foreign currency fluctuations. This method is used when foreign exchange exposure has not been covered.

 

This could take the form of 4 scenarios:

 

Exporter’s perspective

 

Scenario 1: Let’s consider the case of an Exporter who will receive a payment in a foreign currency at a given date. If he forecasts that this foreign currency is likely to appreciate in the future, he might ask the payment to be postponed. By doing so, he expects to increase the amount translated in his domestic currency and ultimately his profit margin.

 

Scenario 2: Conversely, if the Exporter expects a depreciation of the foreign currency in which the payment is denominated, it is in his best interest to speed up the process by asking a payment by anticipation.

 

Importer’s perspective

 

Scenario 3: An Importer who must honour a payment in a foreign currency, is exposed to the risks resulting from its appreciation. This is why if he forecasts an upward trend, it is in his best interest to process the payment in advance in order to limit potential losses.

 

Scenario 4: On the other hand, if the foreign currency is expected to depreciate, the Importer might want to postpone the payment. By doing so, he will be better off, since the payment denominated in his domestic currency will be lower.

 

Shortcomings:

 

It must be pointed out that the leads and lags method is particularly speculative as it is based on predicting exchange rates evolutions. In addition, postponing a payment generally imply an increase of financial cost (cash flow financing) that must be subtracted from potential gains in order to determine whether or not the whole operation is worthwhile conducting.

 

Furthermore, it must be stressed that asking for a payment in advance might not be possible as this might put pressure on buyer’s financial situation. Eventually, this method is hardly compatible with usual payment methods in International trade, which requires a strict compliance with payment terms (letter of credit, documentary collection, etc.…).

Please click on the links below for more hedging techniques

 

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