Leads And Lags

Leads And Lags

What are tracks and offsets?

Leads and delays in international affairs most often refer to the modification of payment or normal receipts in a foreign exchange transaction based on an expected change in exchange rates. When a company or government entity has the ability to control the timing of payments received or made, that organization can choose to pay earlier than expected or delay payment later than expected. These changes would be made in anticipation of enjoying the benefit of a change in exchange rates. This dynamic is true for both small and large transactions.

If a business in one country was about to acquire a business asset in another country and the currency of the country of the target business was to decrease in value compared to the country of the acquiring business, the deferral of the purchase would be in the interest of the acquiring company.

A strengthening of the currency in the process of payment would lead to a decrease in payment for the entity in question, while a weakening of the currency would cause an increase in costs the longer the delay in payment. Because this amounts to a synchronization strategy, the beginning and the delay involve risks. A lack of good execution and can lead to an unfavorable result.

Key points to remember

  • Heading and late refers to the payment schedule on international agreements.
  • Entities that control payments may find it advantageous to delay or speed up payments based on expected currency changes.
  • Not all exchange rate events are properly predicted, but those that can usually be linked to political events.

Understanding tracks and offsets

When a business has an expected foreign exchange transaction following a transaction, it may need to buy or sell a certain currency. If the company believes that the currency can move in a certain direction, it can choose to accelerate the transaction or to delay it to profit from the potential result. The normal movement of supply and demand prices between countries can be very difficult to predict, but certain political events may have a known calendar and can be more easily anticipated (for example, the British Brexit vote).

Speeding up a transaction is known as “leader” while slowing it down is known as “delay”. For example, if a US company has agreed to buy Canadian assets, it will have to buy Canadian dollars and sell US dollars to complete the transaction. If the company believes that the Canadian dollar will strengthen against the US dollar, it will speed up the transaction (advance) before the price of the asset increases in US dollars.

Conversely, if the company believes that the Canadian dollar will weaken, it will delay payment (delay) in the hope that the asset will become cheaper in US dollars.

There are risks in getting ahead and delaying as the currency movement may not go as planned. For example, if the company purchasing the Canadian asset chooses to suspend payment because it believes the Canadian dollar will weaken, and before making the payment, the Bank of Canada (BoC) unexpectedly increases the interest rate, the Canadian dollar will strengthen by making a decision not to harm. For this reason, some companies will choose to make part of the payment at the time of the agreement and wait to pay the rest.

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