Question

The financial instruments market is international - how does this make decisions that companies make more complex? Look at working capital, capital budgeting, and capital financing decisions.

Answer 1

An international financial institution like an investment bank, retail bank, hedge fund etc, operating world wide has various challenges for its smooth functioning of operations. The challenges faced by an institution are in terms of rules and regulations (financial disclosures, data secrecy, capital provisioning etc.) to be followed under different governments, funding required in different currencies, cross border payment rules, settlement rules under clearing house operating in different geographies. Challenges faced for an international financial firm under different given headings are:

Working Capital: An international firm may have its current assets like debtors and current liabilities like creditors located in sparse locations across different geographies. The assets and liabilities could be in different currencies. It may happen that the firm is struggling to meet its immediate short term commitments because of unavailability of short term liquidity. For example a firm may not have readily available US Dollars to meet its short term obligations towards US creditors. It may happen that that firm has excess cash in Euros but it does not has an effective channel to quickly convert its Euros to US dollars.

Capital Budgeting: An international financial firm has to look upon various factors while taking capital budgeting decisions for different projects it is going to undertake. There may be an international project which a firm is going to finance like setting up of telecom towers in APAC region. Before financing such a project there are many country specific risks which has to be considered like policies of different governments, customer base and opportunities in different markets, geo political environment in different countries, foreign policies etc. All these risks prevalent in different countries has to assessed very carefully before taking any investment decision.

Capital Financing: For an international financial firm to invest in a project operating across different geographies, it has to carefully access the Foreign Direct Investment (FDI) policies of different countries. Firm should consider the central bank policies, short term and long term liquidity, taxation rules, geo political environment in different countries where it is going to provide the capital financing. For example a firm should not finance a liquor company in middle east countries like Saudi Arabia, because alcohol is strictly prohibited there under Sharia Law..