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Kong's exposure is deemed too large by the parent company, HAL Mexico and HAL Brazil may
lead its payments to HAL Hong Kong. ¶
In addition to foreign exchange motivations, leading and lagging is also used for liquidity
reasons. For example, if a subsidiary is temporary illiquid, the parent house may decide to
lead payments to that subsidiary and lag payments from the subsidiary.
Because the use of leads and lags is an obvious method for shifting the burden of financing,
many governments impose some limits on the allowed range. For example, the U.K.
government does not allow import leads and the maximum export lag allowed is 180 days.
1.B.2.iv
Matching
The key to hedging is to create a match between inflows and outflows denominated in
foreign currency. Matching involves changing the amounts or the currencies (or both) of
the planned cash flows of a multinational firm or its subsidiaries to reduce the firm's net
transaction exposure. For example, if a subsidiary has positive net inflows denominated in
the subsidiary’s local currency, the parent company can reduce the net transaction exposure
in that currency by increasing expenses denominated in the subsidiary’s local currency.
Table VIII.3 summarizes several matching strategies for a subsidiary of a multinational
firm, depending on its cash flows.
TABLE VIII.3
Subsidiary has positive cash flows
denominated in subsidiary's currency
Subsidiary has negative cash flows
denominated in subsidiary's currency
Increase local purchases
Decrease local purchases
Decrease foreign purchases
Increase foreign purchases
Decrease local sales
Increase local sales
Increase foreign sales
Decrease foreign sales
Increase local borrowing
Reduce local borrowing
Reduce foreign borrowing
Increase foreign borrowing
The decision of several Japanese and German automobile manufacturers to build plants in
the U.S., where a big part of their revenue is generated, can be seen as a matching hedge.
 Transaction Exposure: The Case of Ericsson
Ericsson, the Swedish telecommunications giant, has the largest total customer base in the
telecommunications industry in the world. Ericsson has been working in international
markets since 1880s. Worldwide, four out of ten mobile calls are handled by Ericsson
equipment. Ericsson reported total income from sales in 2000 as SEK 273 billion (USD 29
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