ACCA Financial Management (F9) Certification Practice Exam

Which practice involves adjusting for differences in payment timing to minimize exchange risk?

1. Netting

2. Lead payments

3. Lagged payments

4. Matching assets and liabilities

The correct answer is: Lagged payments

The practice of lagged payments is aimed at managing and minimizing exchange rate risk by strategically timing payment obligations based on currency fluctuations. In this approach, a business will delay payments to suppliers or other parties to take advantage of favorable exchange rates or to mitigate potential losses when rates are unfavorable. By waiting to make payments until a more advantageous exchange rate is available, a company can reduce the impact of currency movement on its cash flows. Lagged payments work effectively in a context where there is uncertainty in currency rates and where the company has the flexibility to delay payments without incurring penalties or damaging supplier relationships. This practice requires careful monitoring of exchange rate trends and an understanding of when to make or postpone payments to optimize financial outcomes. Thus, lagged payments directly address the issue of timing in exchange rate fluctuations, helping companies shield themselves from adverse currency impacts while potentially enhancing their foreign transaction profitability.