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  • Heads of WTO and development banks voice support for trade finance amid COVID-19 crisis July 1, 2020
    The heads of the WTO and six multilateral development banks on 1 July issued a joint statement promising to address shortages in trade finance, so that financial market stresses arising from the COVID-19 crisis do not prevent otherwise-viable trade transactions, including for essential goods such as food, drugs and medical equipment. They committed to do […]
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  • Panels established to review Indian tech tariffs, Colombian duties on fries June 29, 2020
    WTO members agreed at a meeting of the Dispute Settlement Body (DSB) on 29 June to a request from the European Union for a dispute panel to examine India’s tariffs on certain high-tech goods. The DSB also agreed to an EU request for a panel to review Colombia’s anti-dumping duties on frozen fries from Belgium, […]
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  • WTO report on G20 shows moves to facilitate imports even as trade restrictions remain widespread June 29, 2020
    While import-restrictive measures introduced by Group of 20 (G20) economies continue to cover a growing share of trade, the WTO’s latest biannual monitoring report on trade measures — the first to cover a time period coinciding with the coronavirus pandemic — points to significant moves to facilitate imports, including products related to COVID-19. During the […]
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  • DDG Wolff: WTO acceding governments reconfirm value of multilateral trading system June 29, 2020
    At a time when the WTO is under heightened scrutiny and reform of the WTO is a subject of concern for all, the efforts undertaken by acceding governments to join the organization are a force for change, Deputy Director-General Alan Wolff said on 29 June. Speaking at the virtual opening session of the WTO’s Accessions […]
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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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