In international finance, prospects and inaction refers to the acceleration or delay, respectively, settlement of payments or receipts in foreign exchange transactions due to expected changes in exchange rates. Changes in exchange rates can be the cause of losses (or profits) in international trade, so debt settlement is accelerated or postponed in an effort to minimize losses or to maximize profits. In prospects and lags, premature payments for purchased goods are called "lead," while pending payments are called "lag."
Video Leads and lags
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Changes in exchange rates can be the cause of losses (or profits) in international trade. For example, now, we consider that the euro exchange rate against the US dollar is 1.00 (EUR1.00 buying a dollar). In addition, we consider that US importers buy goods for EUR1000 from European exporters and US importers will pay the money 1 month later. If the euro exchange rate against the US dollar is 2.00 a month later, US importers must prepare EUR1000 with $ 2000 in the foreign exchange market for payment. On the other hand, If the euro exchange rate against the US dollar is 0.50 a month later, US importers can prepare EUR1000 with $ 500 for payment.
Thus, if future exchange rate increases are expected in the future, buyers may postpone the payment of goods because the delay may make the purchase of goods cheaper. Conversely, if future exchange rate declines are expected in the future, buyers may pay in advance to minimize losses.
Maps Leads and lags
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Source of the article : Wikipedia
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