International Money Management in Forex
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Company controls over liquid assets break down into two areas; the first is the rationalization of technical foreign exchange transfers, intercompany payments, collection of receipts from third parties, and netting of such payments where possible. Programs and systems that deal with such collections and disbursements of funds are commonly called international cash management.
The second area, which is closely related to the technical management of cash movements, consists of short-term financing programs, investment schemes, and control over foreign exchange exposure, all of which is often designated as financial management.
The two areas overlap; a change in the cash management of a corporation, such as the acceleration of export receivables, has a direct effect on financial management. We have chosen to include both areas in the term international money management, which reflects both technical and discretionary aspects of the control over and the utilization of liquid assets of the international corporation.
International Money Management (lMM) is effective within the legal, banking, and regulatory constraints of individual countries. Much of the purpose of this book is to describe the foreign exchange and international monetary framework within which IMM systems operate as well as the IMM systems themselves.
It illustrates ways of accelerating payments between affiliated companies and reducing the time in which funds are unavailable because they are in transit in banking or postal systems. It gives the steps that an international financial manager would take in setting up IMM system, for the optimum movement of funds, and it justifies a central control point for such systems, moving further to the area of IMM: aspects of which currency to use in export invoicing and the collection of export receivables.
A variety of instruments exist for the international transfer of funds. Lodged in and flowing between banks, they can be simple payment instructions in written form or they can evolve from documentary sales incorporating some form of credit.
The standard method of transferring funds internationally is by mail payment order. In it, the remitter of funds asks its bank to make a transfer in its own or another currency to the recipient. A standard form giving all pertinent details of the transfer.
The remitter's local currency account win be debited on the day the remitter presents the payment order to its bank (in some countries with one-day back value). If the transfer is made in the remitter's own currency, the debit will be for the amount on the order, except that in certain cases a payment commission will be added.
If the transfer is made in a foreign currency, the local bank will make the conversion at the mail transfer rate, which reflects in part the time involved before the banks nostro account (its own working current account) abroad is charged.
Mail transfer is a lengthy process despite the routine use of airmail. In our example the remitter's local bank may not maintain foreign currency accounts abroad; they are chiefly held by the head offices of the larger indigenous banks. It must then send the payment instructions through its main office, central savings bank organization, or domestic bank correspondent, which passes them on abroad.
If the foreign bank named in the payment order is not a direct correspondent of the remitting hank, it must pass on the payment order to a fourth or final bank in the chain. Allowing for mailing time and processing at each bank, a mail transfer that involves several banks in two countries can take eight to ten business days or more.