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International financial management unit 2
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International financial management unit 2



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  • 1. Unit-II Notes:IBE & FM INTERNATIONAL CASH MANAGEMENTWider scope / more complicated / principal & Practices of othercountry / constraint / in multiple tax jurisdiction / multiple currency /language different / local resistance/ technical problem/ govtregulationsFLOW PERSPECTIVE – 1. POSITIONING OF FUND 2. Fund out flow of subsidery 3. Account receivable 4. Inventory 5. Short term debt 1) Positioning of funds Positioning is effected by:- - Tax policy of govt - Cost of capital - Financial structure - - Financial institution - - Stock exchange - Investment environment - Regulatory environmentFlow of funds:- From subsidiary to parent: Dividend / royalties management & techasst fees/remittance - Transfer fund from high tax location to low tax locationConstraint to positioning of funds: -political / tax / transaction costforex riskUse of transfer pricing: - tax effect / tariff effect Unbundled cash flowBlocked fund management Transfer pricing Create unrelated exports Leading & lagging payments2) Fund out flow of subsidery: - fees / royalty / dividend / loanpayment / raw mtrl supply investment 1
  • 2. Problems related outflow:- - Exchange rate fluctuation - Import restriction - Future sales not certainInflow of subsidiary: cash sales / A/c receivable / interest / loan fromparent loan from other source 3) Account recoverable:- credit sales- makes- ACCT / receivable - Investment in – A/c receivable should be beneficial for sale increase or sale maintain - Keep more receivable in strong currency - Relax credit STD. 4) Inventory: - extra reason of inventory :- (1)Long & variable transit time (2)Complex custom rules (3)Dock strikes (4)Import control (5)Political problem (6)Exchange rate variation5) Short term debt: - Short term debt for smooth functioning inwhich currency receivableAspects of International cash managementCharacteristics - Cash comes in multiple currency - Exchange rate variation factor matters - Daily base tranactionary function - Minimize risk - Maximize value of currency - Bring cash in strong or appreciating currency - Adequate cash should be there due to following reasons - - Energy - - Tax - - Duty - - For variation advantage - - Speculative - - Cost of holding cash should be minimized - - Return in liquidity-safety-no default 2
  • 3. - - Balance cash holding cost - - & Opportunity cost - Transfer pacing tax effect / tariff effect - Minimize transaction cost - Minimize transaction - Unbundled fund transfer - In which currency cash holding should be - How much cash holding in liquid - Exchange rate cost minimization - Legislation consideration - Acceleration cash flows - Minimize tax on cash flow - Manage blocked funds - Manage inter subsidiary cash transferObstacle in optimizing cash flow :which prevents above things not tohappen according To wish of finance manager - Company related factor : delay in payments - Govt related factor : ban transfer pricing - Banking related factors : EDI or EFT or NOT EDI or not EFT - Subsidiary related factor : wear supported : strong profit given to week SBUInvest excess cash in short term : Euro- Currency investment - Treasury billsImportant consideration before investment : - Excess cash of all subsidiary pooled or remain separate analysis should be done - How to determine effective yield - Diversify investment or notInvestment policy : decentralized or centralized 1) Effective yield- (a)Interest rate 5% inflation 10% effective yield :-5% (b)Interest rate 10 inflation 5% effective yield 5% 2) Discount & market difference 3) Currency appreciation or depreciation interest rate (comparative analysis) 3
  • 4. 4) Diversify cash across currency 5) Hedging 6) Account receivable:- keep revisable in strong currencyINVESTMENT CRITERIA - Transaction cost should be minimum exchange Rs T0 $ ( bid-ask) again $ to Rs (bid ask) Compare interest rate local & investing country and less transaction costs of conversion then compare the return which ever is higher invest there - Compare risk of investing in other currency - Invest in appreciating currency compare the return after adjusting transaction cost & interest - Compare political risk while investing, lesser political risk country is given preference on these investment which are giving same return same. - Liquidity preference:- If you require money at any time then invest money in most liquid instrument - Compare tax on RO1 :- if two investment plan is giving same return but one country is having less & other more return invest in less two country - Invest in that currency which your have to pay in near future (payment in $, invest in $) - Match the time of investment & payment - Invest in that country currency which highly stable - Invest in highly powerful economy - Invest in appropriate structure - Transfer investment in low tax country - Invest in that country where fund blockage risk is lowest - Give short term loan to organisation which have high credit rating - Give loan to parent - Give personal loan - Invest in euro currency deposit which give higher return - Invest in foreign treasury bill 4
  • 5. - Invest in commercial proper - Invest where integration among market is good - Invest where telecommunication system is good - Develop central cash management & Pool the recourse - Market portfolio of countries & currencies for investment - Use dynamic hedging to hedge investment - Higher yield BORROWING DECISION - Transaction cost should be minimum - Total cost of borrowing should be minimum - Forex risk should be considered (forecast exchange rate) - Borrow from week currency - Borrowing’s time of payment – investment maturity should make - Borrowing that currency- in which you have invested - Borrow from same country – in which you invested - Compare tax while borrowing - Borrow from lowest interest rate but compare total cost of borrowing - Take loan from parent - Take loan from low tax country - Check legal factor - Take across world loan - Diversify across currency & countriesCENTRALISE DECENTRALISED 5
  • 7. It is value – added cash Not pooling the resourcemanagement pooling of recourse- It monitor Every SBU / parent-monitor/- It manage manage its own cash flows(Parent-subsidiary)(subsidiary - subsidiary) cash flows- Help subsidiary in exchange High exchange rate riskrate riskNetting / leading / lagging / These des not take placetransferring takes placeOptimize cash flows :-accderating Slow cash flowMinimize currency conversion More currency conversion costcostMinimize tax on cash flow High tax on cash flowManage blocked funds Blocked fund management problemManage inter subsidiary cash Every individual manage its owntransfer cash transferGive financial support to less Weak SBU’s are in great dangercash earning SBU’s because of cash shortageHigher return Less returnEfficient use of funds Inefficient use of fondInterest received higher due to Less deposit less interesthigh amountReduce financing cost Financing cost highReduce transaction cost Transaction cost highFulfill short term cash need Problem in finding short term cashIt help in keeping the reserve in Cash reserve kept in domesticstrong currency country that may have week currencyHelps in balancing asset & Asset & liability managementliability difficultHelps in receivable / payable If receivable / payment time nottimings matched then problemParent become more powerful in Less expertise in international management Mngt.Strategy formulation / Less contribution in strategyimplementation easy formulation & implementation 7
  • 8. Better co-ordination Co-ordination improperCorporate can know the exact Problem for corporate to knowfinance availability about finance availability with SBU’sFulfill corporate objectives Less contribution in corporate objective fulfillmentMore cash earning SBU’s are not High earning SBU’s are awardedbenefited transfer pricingWeek SBU’s performance over Less paidshown due to corporate helpLoss to high performer manager High performing manger are paid moreHedging / shading/ future / option Hedging / swapping / future /or parent basis option on SBU basis CENTRALISE CASH MANAGEMENT BanksGovt of SBU A Invest on societySBU A short termsecurities PARENT Long term CENTRALISE project CASH MANAGEMENT Source of debtSBU B Stock holderGovt ofSBU B Host GovtACCOUNT RECEIVABLE MANAGEMENT - Investment in receivable should be beneficial, either increase sale or retain sale 8
  • 9. - Should have gain from financing charges - Scrutinize credit terms - Due to competition MNC’s have to relax credit term - Co-ordination between sale & finance Higher target realization on time - Easy credit term-higher sales - Higher sales –higher risk of default - Compare currency value – appreciation or depreciation - Delay appreciating currency receiveable - Try to recover the amount immediately which is in depreciating currency - In general more the delay in receivable more the expenses increase - Use price discount (when buyer and seller booth are interested in appreciation & depreciation of currency) - While making credit policy analysis of cost benefit should be done - Calculate current cost of extending credit - Calculate increamental cost divert revised policy - Calculate increamental profit - If profit is more then cost then select new policyASSET SECURITISATIONASSET SECURITISATION & non recourse project financing / banks& MNC’s / popular in euro market in / Britain / turkey / 1) Special category of financing 2) In it certain assets of MNC are segmented 3) Segmented for the purpose of subsidiary 4) It back’s up the debt of subsidiary 5) Helps in getting finance easily 6) Helps in getting finance cheaply / cost of fund less 7) Credit card receivable & whole projects / car loans receivable 8) In it corporate dedicates its asset to reusable of SBU 9) Company create securities from these liabilities 10) Benefit - Lower interest rat 9
  • 10. - Better balance sheet ratio of B.Liabilities Asset Liability Asset • For securitation 11) Those organization which have high credit rating can do this early 12) Firm sells or assign certain assets such as consumer receivable to a special purpose vehicle (Spv) 13) SPV: - Debts is over collateralized 14) A guarantor from first party or L/c from third party 15) Parent agrees to replenish the asset pool if its value falls 16) Some residual risk is assumed by the parent Validity: -Right condition of market imperfection - Right Tax - Legal frame work 10