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An economic difficult situation or strengthening of an economy will ultimately be reflected in the value of the currency in Foreign exchange market.
The exporter as well as importer are subject to exchange risks due to the fluctuations in foreign exchange market.
At times,rather often one may gain on account of effecting payment in a considerable way and in the same way receiving also may lead to gaining by way of covering the exchange risks.
For the Receiver and payer timing is very important and another factor for quick additional gains and a Leading means demanding a quick recovery so that local gains are more on conversion on the exchange value of receiving currency.
Lagging on the other hand is a delaying tactics followed to avert from the present disadvantage on a sure expectation of a better transaction later on.
The timing of the payment and the attitude of the parties determines whether it is Leading or Lagging in respect of mutual settlement of Foreign exchange owe and receivable.
Leading;
An expected increase in exchange rates to speed up the payments, besides normal payments
Ladding;
The Expected decrease in exchange rates slow down payments, besides normal payments
Accounting technique of expediting (leading) or delaying (lagging) receipts and payments of cash to gain a business advantage. In foreign trade, for example, if a manufacturer has to pay $1 million on a certain date for imported material and receives an export order for $1 million, it might try either to delay the payment for imports or to press for an early payment by the buyer, or both, so that the cash inflow from export is used as cash outflow for imports. It will thus try to escape devaluation risk in import-payment and default risk in export-receipt by juggling two cash flows. Similarly, in transactions between the subsidiaries of the same firm, receipts and payments of cash may be delayed or expedited to defer taxes.
The alteration of normal payment or receipts in a foreign exchange transaction because of an expected change in exchange rates. An expected increase in exchange rates is likely to speed up payments, while an expected decrease in exchange rates will probably slow them down.
Basically this means a change in the present value of the future after tax cash flows due to changes in exchange rates. Leading and lagging
AGREE WITH ALL ANSWERS
Leading is expediting and lagging is delaying the outflow of foreign exchange in order to gain a business advantage arising from the fluctuating foreign exchange rates. For example an Indian Firm which is due to receive payments from it's customer in the UK, may press for prompt payment from the customer if it expects the GBP rate to fall in future, when this happens we say that the Indian firm is leading it's receivables. On the other hand the UK based customer will try to lag the payment in order to gain advantage from the expected bearish trend of the GBP-INR exchange rate, if this happens we say the UK firm is lagging it's payables.
Agreed with the answer Syed Raza
