Role of International Financial Manager in MNC's

Financial Management

That business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial need and overall objectives of business enterprises

Approaches to Finance function

Traditional approach: Finance function was confined to only procurement of funds

Modern Approach: It includes both raising of funds as well as their effective utilization

Financial decisions

1. Investment decision 2. Financing decision3. Dividend decisions

1. Investment decision : It involves the determination of total amount of assets to be held by the firm

Financial managers must quantify the benefits, costs, and risks associated with an investment in a foreign country

To do this, managers use capital budgeting

2. Financing decision : It involves the selection of the suitable source of funds.

Firms must consider two factors when considering financing options:

How the foreign investment will be financed How the financial structure of the foreign affiliate should be configured

3.Dividend decision: Quantum of profit to be distributed among the shareholders

These decisions are more complex in international business because of the different currencies, tax regimes, regulations on capital flows, economic and political risk, and so on between countries

Domestic Financial Management vs. International Financial Management

Considerations in International Financial Management:• Must consider the effect of exchange rates and changes in

exchange rates on the inter-country transfer of cash flows• Must consider the political risk associated with actions of

foreign governments• Must consider how accounting methods, tax laws, business

regulations, and other institutional rules and arrangements affect business transactions and cash flows in each country in which the firm does business, adding to the complexity of foreign operations

• Must consider language and cultural differences when dealing in international commerce

Role of domestic financial manager

Financial forecasting and planningAcquisition of funds.Investment of fundsHelping in valuation decisionMaintaining proper liquidity

Role of international financial manager in MNC’s

1. Currency Transactions 2. Managing foreign exchange risk exposure3. Global Money Management4. Financing International Business Operations

1. Currency Transactions: It takes place when

MNC’s wants to make foreign investment. Making payments to the clients

Types of Currency Transactions

Spot Trade Forward Trade

Spot Trade – An agreement to trade currencies based on the exchange rate today for settlement immediately (“on the spot”), technically within two business days

Forward Trade – An agreement to exchange currency at a specified future date at a specified price agreed upon today (also called a forward contract)

2. Foreign exchange risk :

It is the possibility of a gain or loss to a firm that occurs due to unanticipated changes in exchange rate

Types of foreign exchange risk exposure

Translation Exposure Transactions Exposure Economic Exposure

Translation Exposure -- Relates to the change in accounting income and balance sheet statements caused due to changes in exchange rates.

Transactions Exposure – It refers to the extent to which the future value of the firms domestic cash flow is effected by exchange rate fluctuations.

Economic Exposure – It refers to the degree to which a firm present value of future cash flows can be influenced by exchange rate fluctuations.

3. Global Money Management:

Money management decisions attempt to manage global cash resources efficiently It includes:

Minimizing Cash BalancesReducing Transaction Costs

Minimizing Cash BalancesFirms need cash balances on hand for notes payable and unexpected demands

To keep cash accessible cash reserves are usually invested in money market accounts that offer low rates of interest

If firms could invest for a longer time frame, they could earn higher rates of interest

Reducing Transaction Costs

Transaction costs are the cost of exchange

Every time a firm changes cash from one currency to another, they face transaction costs

Most banks also charge a transfer fee for moving cash from one location to another

Multilateral netting can reduce the number of transactions between subsidiaries and the number of transaction costs

4.Financing International Business Operations

EXIM Bank (Export-Import Bank).

Loans from the parent company or a sister affiliate.

Eurodollar loans.

Eurobond market

International Equity markets.The International Finance Corporation (IFC).

CONCLUSION

The job of International Finance manager is getting tough, tougher and toughest these days.