What are the determinants of leading and lagging payments between related international affiliates?
What will be an ideal response?
A leading payment is a payment made earlier than usual; while a lagging payment is a payment made later than usual. By shortening and lengthening the payment cycle of payments between related affiliates, an MNC can affect the liquidity of its affiliates around the world.
The foremost determinant of leading and lagging by an MNC is the nature of the relevant opportunity costs associated with the net working capital of each of its affiliates. This interest rate must be based on a common currency, such as the dollar, and it should be calculated on an after-tax basis. Funds should then be moved from affiliates that have a low opportunity cost of net working capital to affiliates that have a high opportunity cost of net working capital.
Leading and lagging payments can also be done to transfer funds into countries whose currencies are expected to appreciate and out of countries whose currencies are expected to depreciate.
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