Question

1.) Explain how multilateral netting works. Why would a company do this?

2.) What is a functional currency?

3.) Explain the various ways one part of a firm could use to transfer money to another part of the same company?

Please help me answer these international finance questions.

Answer 1

• Multilateral netting is a settlement mechanism used by companies to pay for goods and services purchased from affiliated companies. The netting process consolidates intercompany transactions and calculates settlement requirements internally instead of using external payment systems.
  The Company does Multilateral netting are that the company consolidates a single transaction log with dates, currency conversion rates, and business transaction details, which helps to facilitate the work of auditors when they examine cross-border activity. Other benefits are Reducing intercompany cash flows to one each month for each subsidiary, Simplifying payment schedules, Streamlining invoice reconciliation between companies, Streamlining the quarterly reconciliation of accounting ledgers, Easier resolution of accounting mistakes , Standardizing intercompany finance procedures, Reducing the costs of cross-border money transfers, Consolidating debt and obtaining better interest rates, Enhancing the transparency of intra-firm financial transactions, Consolidating local and non-local cash pools into a single pool, Centralizing risk, Optimizing funds use and Making payment processes for group companies more efficient.
• Functional currency refers to the main currency used by a business or unit of a business. It is the monetary unit of account of the principal economic environment in which an economic entity operates. functional currency is the currency used in the primary economic environment where an entity operates. This is the environment in which an entity primarily generates and expends cash. You should consider the following primary factors in determining an entity’s functional currency, the currency that primarily influences sales prices. The currency of the country whose competition and regulations primarily influence sales prices. The currency that primarily influences labor and other costs of goods sold.
• various ways one part of a firm could use to transfer money to another part of the same company are Wire transfer, bank transfer or credit transfer, is a method of electronic funds transfer.