Leading and Lagging technique is a general protection measure for Foreign Exchange Risk Exposure Management. Explain.

Leading and Lagging is a technique used by subsidiaries of multinational corporations (MNCs) for optimizing cash flow movements by adjusting the timing of payments to determine expectations about future currency movements. It is a general protection measure for foreign exchange risk exposure management. Leading (Acceleration): This involves accelerating the timing of foreign currency payments. If a subsidiary expects its domestic currency to depreciate against a foreign currency in which it has payables, it would accelerate its payments (lead its payments) to pay before the domestic currency loses more value. Similarly, if it expects the foreign currency in which it has receivables to depreciate, it would accelerate the collection of those receivables. Lagging (Delay): This involves delaying the timing of foreign currency payments. If a subsidiary expects its domestic currency to appreciate against a foreign currency in which it has payables, it would delay its payments (lag its payments) to pay later when its domestic currency can buy more foreign currency. Conversely, if it expects the foreign currency in which it has receivables to appreciate, it would delay the collection of those receivables to receive more domestic currency later. How it works: MNCs accelerate (lead) or delay (lag) the timing of foreign currency payments through adjustment of the credit terms extended by one unit to another. The technique helps to reduce foreign exchange exposure or to increase available working capital. Firms accelerate payments of hard currency payables and delay payments of soft currency payables in order to reduce foreign exchange exposure. Example: A MNC in the USA has subsidiaries all over the world. A subsidiary in India purchases its supplies from another subsidiary in Japan. If the Indian subsidiary expects the rupee to fall against the yen, then it shall be the objective of that firm to accelerate the timing of its payment before the rupee depreciates. Such a strategy is called Leading. On the other hand, if the Indian subsidiary expects the rupee to rise against the yen, then it shall be the objective of that firm to delay the timing of its payment before the rupee appreciates. Such a strategy is called Lagging. MNCs should be aware of government restrictions in such countries before availing of such strategies. Leading and lagging involve the movement of cash inflows and outflows, forward and backward in time, so as to allow netting and achieve various goals. Regulations governing Leading and Lagging are subject to frequent changes and vary from country to country. So, the global finance manager has to keep himself abreast of such changed regulations before he can successfully employ this technique.