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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Bharat Imports Ltd has a USD payable due in three months. Management expects the rupee to depreciate sharply against the dollar over this period and wants to reduce the rupee cost of the payable. Which leads-and-lags action is consistent with this view?

The importer should lead the payment, settling the dollar liability early. If the rupee is expected to depreciate, each dollar will cost more rupees later, so paying sooner at today's lower rupee cost reduces the outflow. Lagging is appropriate only when the rupee is expected to strengthen.

  1. ALead the payment by settling the USD payable earlier than the due dateCorrect
  2. BLag the payment by delaying settlement beyond the due date
  3. CConvert the payable into a rupee receivable through netting
  4. DLeave the exposure open and pay on the due date at the then spot rate

Explanation

If the rupee is expected to weaken, each dollar will cost more rupees later, so paying early (leading) locks in the cheaper current rate. Lagging would suit an expected rupee appreciation. Paying on the due date leaves the exposure unmanaged.

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