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Leads And Lags

Definition

In international finance, leads and lags refer to the expediting or delaying, respectively, of settlement of payments or receipts in a foreign exchange transaction because of an expected change in exchange rates. A change in exchange rates can be a cause of loss in international trade, thus the settlement of debts is expedited or delayed in an attempt to minimize the loss or to maximize the gain. In the leads and lags, the premature payment for goods purchased is called a "lead," while the delayed payment is called a "lag."

What is 'Leads And Lags'

Leads and lags is 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.

Explaining 'Leads And Lags'

Accelerating the transaction is known as "leads", while slowing it down is known as "lags". Leads will result when firms or individuals making payments expect an increase in the foreign-exchange rate, while lags arise when the exchange rate is expected to fall. Leads and lags are used in an attempt to improve profits.


Further Reading


Energy shocks and financial markets
papers.ssrn.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

Leads and lags in sovereign credit ratingsLeads and lags in sovereign credit ratings
www.sciencedirect.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

The relationship between financial variables and real economic activity: evidence from spectral and wavelet analysesThe relationship between financial variables and real economic activity: evidence from spectral and wavelet analyses
www.degruyter.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

High frequency analysis of lead-lag relationships between financial marketsHigh frequency analysis of lead-lag relationships between financial markets
www.sciencedirect.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

Industry information diffusion and the lead-lag effect in stock returnsIndustry information diffusion and the lead-lag effect in stock returns
academic.oup.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

The corporate social-financial performance relationship: A typology and analysisThe corporate social-financial performance relationship: A typology and analysis
journals.sagepub.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

Time-varying leads and lags across frequencies using a continuous wavelet transform approachTime-varying leads and lags across frequencies using a continuous wavelet transform approach
www.sciencedirect.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …

Causality between financial development and economic growth: an application of vector error correction and variance decomposition methods to Saudi ArabiaCausality between financial development and economic growth: an application of vector error correction and variance decomposition methods to Saudi Arabia
www.tandfonline.com [PDF]
… prices even after controlling for infrequent trading of stocks. Chan-Chan-Karolyi investigates leads and lags in volatility between index futures and cash markets using a GARCH framework. Lead-lag relations between daily …



Q&A About Leads And Lags


What is the definition of a lag?

A lag is when payment for goods are made later than expected.

How do lags reduce exposure to adverse movements in currency values?

By slowing down transactions, lags can help reduce exposure to adverse movements in currency values by lengthening the period over which any loss will be incurred.

When does lags occur?

Lags occur when the exchange rate is expected to fall.

What happens when there are no leads or lags involved with a transaction?

When there are no leads or lags involved with a transaction, both parties simply agree upon how much time there should be between sending and receiving funds so as not to risk losing out due to unexpected changes in exchange rates .

What is leads and lags?

Leads and Lags is the alteration of normal payment or receipts in a foreign exchange transaction because of an expected change in exchange rates.

When does leads occur?

Leads occur when firms or individuals making payments expect an increase in the foreign-exchange rate.

What is the definition of a lead?

A lead is when payment for goods are made earlier than expected.

Why would an importer want to pay early or late?

An importer may want to pay early if they expect the price of their currency will rise in value, thus paying early allows them to save money on their purchase. On the other hand, an importer may want to delay payment if they expect that their currency will lose value in relation to another currency, thus delaying payment allows them to spend less money on their purchase.

How can changes in exchange rates cause loss (or gain) in international trade?

If an importer expects that prices will increase and pays before it needs too, then he or she loses out on potential savings by paying too soon. Conversely, if an exporter expects that prices will decrease and receives payment before it needs too, then he or she loses out on potential profits by receiving too soon.

How do leads improve profits?

By speeding up transactions, leads can help improve profits by reducing exposure to adverse movements in currency values.

Can you give me some examples of transactions where one party might have wanted more time than another party had allowed for ?

Yes , let's suppose we have two companies

How does this affect payments between countries?

This affects payments between countries because both parties must agree upon how much time there should be between sending and receiving funds so as not to risk losing out due to unexpected changes in exchange rates.