Question

Explain Transaction Exposure and why this may be a potential foreign exchange risk for an Australian business exporting internationally. Discuss how Leading and Lagging strategies could be appropriate for managing risk. Your answer should include three citations.

Answer 1

Meaning of transaction exposure :-

It is the level of uncertainty businesses involved in international trade face. Specifically it is risk that currency exchange rate will be fluctuate after a firm has ready undertaken for financial obligations. A high level of vulnerable to shifting exchange rates can lead to major capital losses for these international business

One way that the firm's limit their explosure to change in exchange rates to implement a Hegde strategy. Through using hedging using forward rates , they lock in favourable rate of currency exchange and avoid to explosure risk.

Leading:-

Leading is the payment of an obligation before due date while lagging is delaying the payment of an obligation past due date. The purpose of these techniques is for company to take advantage of expected devaluation or revaluation of the appropriate currencies. Lead and lag payments are particularly useful when forward contracts are not possible.

Lagging:-

On the other hand, in case of lagging payment to an independent third party, there is always possibility of upsetting the trading relationship, with possible loss of credit facilities or having prices increased to compensate for the delay in the receipt of funds. There is also the possibility of damage to the lagging companies external credit rating.

Appreciate for managing the risk:-

It is more attractive to use for the payment between the associate companies within a group. Leading and Lagging are aggressive foreign exchange management tactics designed to take the advantage of the expected exchange rate changes.