Capital flows have traditionally focused on the ‘demand side’ of emerging market financing by examining current account balances, which are equal to the net external financing needs of countries, and then seeking to identify ways in which these financing needs could be met and on what terms. However, this approach ignores trends in capital flows into and out of the major advanced economies, which are the source of most cross-border capital and the main reason why gross flows have risen so dramatically relative to net flows. These flows are typically in a securitized form and, as such, are susceptible to trading in active secondary markets. By one estimate, investors in the mature markets of Europe, the United States and Japan have been accumulating securities issued outside their own countries at the rate of about US$1 trillion a year (Smith 2000). This means that international capital flows are increasingly determined by global asset-allocation decisions made by globally active financial institutions in major industrialized countries. These institutions are becoming increasingly concentrated as a result of the global trend toward consolidation. Understanding capital movements increasingly requires an analysis and understanding of the underlying investor base.
A case in point relates to the on-off nature of the market for emerging market dollar denominated bonds. The dedicated investor base for emerging market securities has contracted in recent years, reflecting the closure of several large hedge funds, the orientation of other hedge funds toward mature market investments and reductions in the capital allocated to support the activities of the proprietary trading desks of some international investment banks.… Read the rest
International money managers attempt to attain on a worldwide basis the traditional domestic objectives of cash management: (1) bringing the company’s cash resources within control as quickly and efficiently as possible and (2) achieving the optimum conservation and utilization of these funds.
Accomplishing the first goal requires establishing accurate, timely forecasting and reporting systems, improving cash collections and disbursements, and decreasing the cost of moving funds among affiliates. The second objective is achieved by minimizing the required level of cash balances, making money available when and where it is needed, and increasing the risk-adjusted return on those funds that can be invested. Restrictions and typical currency controls imposed by governments inhibit cash movements across national boundaries. These restrictions are different from one country to other. Managers require lot of foresight, planning, and anticipation. Other complicating factors in international money management include multiple tax jurisdictions, multiple currencies, and relative absence of internationally integrated interchange facilities for moving cash quickly from one place to other. However, by adopting advanced cash management techniques MNCs are able to take advantage of various opportunities available in different countries. By considering all corporate funds as belonging to a central reservoir or ‘pool’ and managing it as such, overall returns can be increased while simultaneously reducing the required level of cash and marketable securities worldwide.
Advantages of Centralized Cash Management System
When compared to a system of autonomous operating units, a fully centralized international cash management program offers a number of advantages, such as;
- The corporation is able to operate with a smaller amount of cash; pools of excess liquidity are absorbed and eliminated; each operation will maintain transactions balances only and not hold speculative or precautionary ones.
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Multinational Corporations (MNC’s) grant trade credit to customers, both domestically and internationally, because they expect the investment in receivables to be profitable, either by expanding sales volume or by retaining sales that otherwise would be lost to competitors. Some companies also earn a profit on the financing charges they levy on credit sales.
The need to scrutinize credit terms is particularly important in countries experiencing rapid rates of inflation. The incentive for customers to defer payment, liquidating their debts with less valuable money in the future, is great. Furthermore, credit standards abroad are often more relaxed than in the home market, especially in countries lacking alternative sources of credit for small customers. To remain competitive, MNCs may feel compelled to loosen their own credit standards. Finally, the compensation system in many companies tends to reward higher sales more than it penalizes an increased investment in accounts receivable. Local managers frequently have an incentive to expand sales even if the MNC overall does not benefit. Two key credit decisions to be made by a firm selling abroad are the amount of credit to extend and the currency in which credit sales are to be billed.
The following five-step approach enables a firm to compare the expected benefits and costs associated with extending credit internationally:
- Calculate the current cost of extending credit.
- Calculate the cost of extending credit under the revised credit policy.
- Using the information from steps 1 and 2, calculate incremental credit costs under the revised credit policy.
- Ignoring credit costs, calculate incremental profits under the new credit policy.
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Forfaiting is a specialized form of trade finance that allows the exporter to offer extended credit to the importer. Under forfaiting , the importer gives the exporter a bundle of bills of exchange or promissory notes covering the principal amount as well as the interest. Each tranche of the notes fall due at different points of time in the future, e.g. every six months, extending up to several years. The notes are backed by an aval or guarantee provided by a reputed bank in the importer’s country. The exporter can then discount these notes without recourse with banks who specialize in the forfaiting business to generate an immediate cash flow. This means that if either the importer or the guaranteeing bank fails to pay when notes fall due, the forfaiter cannot ask the exporter for reimbursement. The credit risk is assumed entirely by the forfaiter. The forfaiter in turn, may hold the notes in its own portfolio or sell different tranches in the secondary market (obviously at a discount smaller than what was charged to the exporter). Forfaiting tends to be a specialized business because each underlying export-import transaction generally has unique features.
- Forfaiting in Export Finance
- Export Bills of Exchange
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Buyer’s Credits are a form of Eurocurrency loans designed to finance a specific transaction involving import of goods and services. Under this arrangement, lending bank(s) pay the exporter on presentation of shipping documents. The importer works out a deferred payment arrangement with the lending bank, which the bank treats as a loan. Large loans are club loans or syndicated loans. Many provisions in the loan agreement are quite similar to a general purpose syndicated credit. However, a number of formalities have to be completed before the exporter can draw funds. The interest rate of the loan is linked to a market index such as LIBOR. In some cases, a state Export Credit Agency from the exporter’s country may pay a subsidy to the banks so that an attractive funding cost can be offered to the importer.
Another aspect is the Line of Credit. Lines of Credit are like buyers credits but are much wider in scope. A typical buyer’s credit involves one transaction between one supplier and one buyer. A line of credit covers several purchase transactions with the buyer importing different items from different suppliers. Many buyers can also be involved provided the ultimate credit risk is that of a single buyer or guarantor.
In a supplier’s credit, the exporter extends credit to the importer by allowing it to pay on a deferred payment basis. Promissory notes issued by the importer evidence the credit. Like in forfeiting, the supplier can discount the paper with a bank.… Read the rest
Commonly used in international trade, a draft is an unconditional order in writing – usually signed by the exporter (seller) and addressed to the importer (buyer) or the importer’s agent – ordering the importer to pay on demand, or at a fixed or determinable future date, the amount specified on its face. Such an instrument, also known as a bill of exchange, serves three important functions:
- To provide written evidence, in clear and simple terms, of financial obligation.
- To enable both parties to potentially reduce their costs of financing.
- To provide a negotiable and unconditional instrument (that is, payment must be made to any holder in due course despite any disputes over the underlying commercial transaction.)
Using a draft also enables an exporter to employ its bank as a collection agent. The bank forwards the draft or bill of exchange to the foreign buyer (either directly or through a branch or correspondent bank), collects on the drafts, and then remits the proceeds to the exporters. The bank has all the necessary documents for control of the merchandise and turns them over to the importer only when the draft has been paid or accepted in accordance with the exporter’s instructions. The conditions for a draft to be negotiable are that it must be:
- In writing
- Signed by the issuer (drawer)
- An unconditional order to pay
- A certain sum of money
- Payable on demand or at a definite future time
- Payable to order of bearer
There are usually three parties to draft.… Read the rest