managing short-term assets and liabilities & foreign investment decisions

7/28/2019 Managing Short-term Assets and Liabilities & Foreign Investment Decisions

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Managing short-term assets and liabilities

and

Foreign Investment Decisions

Submitted to: Submitted by:

Pallavi Maam Alpa VyasAshish Sharma

Dheera Joshi

Pallavi GuptaPreeti Bhatt

Tabassum Rasiya


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Short-termAssetsandLiabilities


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Short-Term Assets and Liabilities

Cash

Receivables

Investment Inventories

payables


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Assets Liability Management

It is a dynamic process of planning, organizing

& controlling of Assets & Liabilities- their

volumes, mixes, maturities, yields and costs in

order to maintain liquidity and Net Interest

Income(NII).


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Components

Cash Management

Inventory management

Receivables management Short term investments and borrowings


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Cash Management

Cash management is most important and

more complex.

This is because of possibility of raising and

deploying cash in many currencies and many

locations.

Profit opportunities are presented by

imperfections in international money and

foreign exchange markets.


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The essence of short-term financial

management is-

1) minimizing working capital risk consistent

with other policies.

2) raise short-term funds at minimum possiblecost and deploy short-term cash surpluses at

maximum possible rate of return.


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Inventory Management

Inventory is in form of raw material, work-in-

progress and finished goods.

It is held to facilitate:

1. The production process by ensuring suppliers

needs.

2. To make sure that goods are available at thetime of sale.


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There are variety of reasons for difficulties

faced in controlling oversea inventory.

These are:

1. Long and variable transit time if ocean

transport is used.2. Lengthy custom proceedings.

3. Dock strikes.

4. Import controls.5. Changes in currency values etc.


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Accounts Receivables Management

Firms grant trade credit to customers, both

domestically and internationally.

This is because they expect the investment in

receivables to be profitable either by

expanding sales volume or by retaining sales

that is lost by their competitors.

Some companies also earn profit on financing

charges they levy on credit sales.


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Need to scrutinize credit terms in countries

experiencing rapid inflation. Finance and marketing coordination is very

important for proper management of

receivables. Educated sales force will work out for this.


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Short-term borrowing and investment

International financial centers like London,

New York and Tokyo offer variety instruments

to raise short-term financing.

Principal dimensions of borrowing-investment

decisions are instrument, currency, location of

financial centre and tax related issues.


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Apart from bank loans, the other major

instruments for short-term funding arecommercial paper and in US domestic money

market, bankers acceptances.

Commercial paper are accessible tocorporations with high creditworthiness.

It is cheaper than a bank loan.


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Purpose & Objective of ALM

An effective Asset Liability Managementtechnique aims to-

manage the volume, mix, maturity, ratesensitivity, quality and liquidity of assets andliabilities as a whole so as to attain apredetermined acceptable risk/reward ration.

stabilize short-term profits, long-term earningsand long-term substance of the bank.


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The parameters for stabilizing ALM system are:

1. Net Interest Income (NII)2. Net Interest Margin (NIM)

3. Economic Equity Ratio


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FOREIGNINVESTMENTDECISIONS


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It means firms become multinational when they

undertake Foreign Direct Investment, i.e., FDI.

It involves:

Greenfield investment, ex. Hondas Ohio Plant

Cross-border mergers & acquisitions, ex. Ford over

Mazda and Jaguar.

FDI help linking national economies and defineemerging global economy.


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Why do firms invest overseas??

There are some of the key factors which influence firms decision

to invest overseas:

Trade barriers

Imperfect labor market

Intangible assets

Vertical integration

Product life cycle

Shareholder diversification services


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Cross-Border Mergers &

Acquisitions This is an increasingly popular mode of FDI, which involves

combining with or buying existing foreign businesses.

Firms going multinational, undertake this for the following

reasons:

To encourage their competitive position in the global market.

To get two key advantages over Greenfield investments, i.e.,speed and access to proprietary assets.

To get synergistic gains.

To successfully internationalize R&D capabilities of the target.


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Foreign Portfolio Investment (FPI)

Because portfolio investment earnings are more likely to betied to the broader macroeconomic indicators of a country,

such as overall market capitalization of an economy, they can

be more sensitive to factors such as:

High national economic growth rates. Exchange rate stability.

General macroeconomic stability.

Levels of foreign exchange reserves held by the centralbank.

General health of the foreign banking system.

Liquidity of the stock and bond market.

Interest rates.


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Portfolio investors also look at the economic policy

environment as well, and at factors such as: The ease of repatriating dividends and capital.

Taxes on capital gains.

Regulation of the stock and bond markets.

The quality of domestic accounting and disclosuresystems.

The speed and reliability of dispute settlement

systems. The degree of protection of investors rights.


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Political Risks: Rules of the Game

These refer to the potential losses to the parent firm due toadverse political developments in the host country.

Depending on the incidence, political risks can be classified as:

Macro risk

Micro risk

And, depending on the manner in which firms are affected,

political risks can be classified as:

Transfer risk

Operational risk

Control risk


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References

1. Cheal S. Eun. Bruce G. Resnick, International FinancialManagement TMH

2. A project report by 2013The Levin Institute - The State

University of New York

3. P.G. Apte, International financial management TMH4. Alan C. Shapiro, Multinational Financial Management,

Prentice Hall of India ,4th edition.


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ANY QUESTIONS??

managing short-term assets and liabilities & foreign investment decisions

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