ACCA Financial Management (F9) Certification Practice Exam

What do lead payments refer to in the context of currency risk management?

1. Payments made after delivery of goods

2. Payments made in advance for goods

3. Payments that are delayed

4. Payments that are matched to liabilities

The correct answer is: Payments made in advance for goods

Lead payments refer to payments made in advance for goods or services. In the context of currency risk management, making lead payments can serve as a strategy to mitigate potential fluctuations in exchange rates. By paying for goods upfront, a company locks in the current exchange rate and protects itself from any adverse movements in currency values that could occur before the time of delivery. This practice can be particularly beneficial when a company anticipates that the currency in which it has to make the payment may depreciate in the future. Using lead payments is a proactive approach to managing currency risk, as it allows businesses to establish certainty regarding costs and protect profit margins. Companies must balance the advantages of this strategy with considerations such as cash flow and the opportunity cost of tying up funds in advance payments. Other payment strategies, such as lag payments or matching payments to liabilities, involve different levels of risk and may not provide the same level of protection against currency fluctuations.