Monetary and Financial Environment of a Transnational Company, Role and Place of Currency and Credit Relations in the Activities of Transnational Companies - International Economics

Monetary and Financial Environment of a Transnational Company

An exceptional feature and a problem of almost all transactions in international business is the need to conduct financial transactions in foreign currency, which exposes transnational companies to the risk resulting from negative fluctuations in foreign exchange rates. At the same time, it is customary to allocate transactional, translational and economic risks. Transnational companies should minimize the impact of currency fluctuations on their operations.

Equally specific in the context of transnational companies and working capital management. The parent company and each of its subsidiaries must have sufficient funds to carry out normal activities and cover unforeseen monetary needs. In addition, the company must monitor the volumes of all currencies in which it and its subsidiaries carry out their transactions. In multinational companies, centralized management of cash transactions and netting is often practiced. This is done in order to manage cash balances, reduce the cost of currency conversion and minimize the risks of negative changes in exchange rates.

Taking into account the special requirements of international business in the conditions of transnational companies, the efficiency of investments should be assessed. All management decisions here should be adjusted taking into account differences in currency risks, restrictions on the movement of capital and all kinds of payments between the parent company and its subsidiaries.

Finally, the financial managers of multinational companies must continuously monitor relatively cheap sources of capital on an international scale. The most important sources are well-developed, efficient international capital markets. In addition, multinational companies can use the services of the swap market to reduce the risk of negative changes in exchange rates or interest rates.

Key terms:

currency risk; forecasting of exchange rates; hedging of currency risks; transnational capital; Eurocurrency; transnational banks; Transaction (operational) currency risk; translation currency risk; risk distribution; risk diversification; final course method; the current method of currency translation.

The role and place of monetary relations in the activities of multinational companies

For modern transnational companies that receive up to 70-80% of their profits as a result of operations in foreign markets, monetary and credit relations play an increasingly important role. If before the end of the 1960s. the world's leading companies did not attach much importance to their foreign operations, now most of them have even created special departments for managing international trade and financial transactions.

As a rule, all transactions of multinational companies outside national borders are paid in foreign currency. It is obvious that international companies that receive or pay for goods and services with foreign currency expose themselves to exchange rate exchange risks. For example, a German company, having concluded an agreement for the export of its products with an American partner in US dollars, assumes the risk of a negative change in the dollar's rate towards maturity. In the case of a payment in euro, the exchange rate risk associated with currency exchange is transferred to an American company, which subsequently may prefer to deal with suppliers ready to execute the transaction in the currency of the importing country (in US dollars).

Companies investing in foreign securities perform their decisions on the basis of comparing the expected profit with capital in different countries, and therefore, taking into account currencies. In order to make the right decision under such conditions, the investor needs information, first, on the profitability of various types of investments and, secondly, on the change in exchange rates between the domestic currency and the currencies of the countries in which it is intended to make investments. Only if such data are available, the investor can translate the expected return on investment in different countries (currencies) into one currency, compare the options analyzed and make the right decision.

Transnational companies on the international capital market are very active at present, acting as the main intermediaries of foreign trade lending and organizers of the export and redistribution of capital between countries. Transnational companies have significant savings, using which, they cover more than half of their need for productive resources. Nevertheless, multinational companies are constantly in need of funds to serve the growing production and marketing of products. In the process of operation, multinational companies actively use the world market, including national, foreign markets, as well as the international euromarket, to which they resort most often, since the euro market is not limited by national control and gives advantages in obtaining loans.

Transnational companies actively use the international capital market not only to obtain loans for servicing current payments and long-term investments, but also for the most favorable placement of their monetary and financial assets. In the process of placing their funds, transnational companies inevitably and constantly face the volatility of exchange rates and interest rates of money markets.

Obviously, to reduce these and similar risks from changes in exchange rates, an international company can as accurately as possible predicting exchange rates and the movement of currency masses, and also reasonably using methods of hedging currency risks in the currency market.

The hedging of currency risks arising from changes in exchange rates in settlements with branches and partners located in different countries is the main object of using foreign exchange operations for modern transnational companies. Another important direction for the use of foreign exchange transactions by transnational companies is the extraction of profits from the movement of liquid resources, depending on the changing world market of the credit market in its various centers. All this contributes to the development of existing markets and new financial instruments.

To better assimilate the main currency transactions considered in the future, let's consider the most important categories and concepts of international monetary and financial relations.

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