International cash management in a multinational group
International cash management of multinational firms is distinct from national firms in
respect of the following:
- Billing in foreign currencies gives rise to exchange risk;
- Techniques of transfer of international funds are different;
- Exchange regulations put several constraints on foreign exchange flows.
In view of the above distinct characteristics, the finance manager engaged in international
business aims at reducing the exchange risk on the one hand and minimizing the float by
‘speedy’ transfer on the other.
Exchange rate risk may be covered or even avoided if billing is done in the national
currency. For the purpose, the finance manager may:
- Take recourse to advances in foreign currencies;
- Cover on the forward market by buying or selling;
- Cover on the futures market by buying or selling futures contracts;
- Cover on options market by selling and buying call or put options in foreign
currencies; - Cover through currency swaps.
Similarly, interest rate risk may also be minimized.
Cash management costs may be reduced by adopting various measures such as reduction
of ‘float’. The term float represents the time period during which the funds are not
available to the enterprise since they are in the process of being transferred. In
international trade, the time taken in transfers is often long (may be several weeks) and
floats may be very significant.
Let us take an example. An Indian importer has bought some product from a German
company. The payment can be made either in Deutschmarks or in Indian rupees.
Settlement in foreign currency (DM). The importing Indian company gives an order to
its bank to make a payment in DM to the bank of the exporter. The bank of the importer
buys DM on the exchange market. It notifies to its German correspondent to make the
payment. The correspondent bank will debit the account of the Indian bank and credit the
account of the exporter.
Settlement in national currency (rupees). In this case, exchange operations are done in
the country of the exporter. The ‘float’ is not uniform for all countries; it varies
considerably among countries. The cost of ‘float’ is obviously higher when the time
taken in recovery is longer, when interest rates are higher and the amount in question is
significant.