ACCA Financial Management (F9) Certification Practice Exam

Which method of foreign currency risk management involves making notable changes in the timing of transactions?

1. Spot hedging

2. Leading and lagging

3. Currency invoicing

4. Asset matching

The correct answer is: Leading and lagging

The method of foreign currency risk management that involves making notable changes in the timing of transactions is leading and lagging. This approach is designed to mitigate exposure to currency fluctuations by strategically managing the timing of receivables and payables. In leading, a company accelerates the timing of payments or collections to take advantage of favorable exchange rates. For instance, if a company anticipates that the value of a currency will decline, it may choose to pay its foreign suppliers sooner, thus reducing its cost in the local currency when the payment is made. Conversely, lagging involves delaying payments or collections in anticipation of a more favorable exchange rate. By postponing a payment, a company hopes the currency will strengthen, allowing them to benefit from a better rate when they eventually transact. This technique is particularly effective for companies dealing with recurring transactions or predictable cash flows since it allows them to use their insights on currency trends to optimize their exchange rate exposure. Spot hedging, while effective in certain situations, typically involves entering into transactions at the current exchange rate, and does not actively change the timing of transactions. Currency invoicing focuses on the denomination of invoices in a particular currency to obviate exchange rate risk, while asset matching involves aligning assets and liabilities in