Compare two (2) methods that a company can use as payment for international trade.
Recently, the world has been connected through trade and exchange of goods and services are currently on the rise among different nations. However, most companies have been left with a dilemma on which payment methods they will choose to use in the international market. For that reason, there are two methods that companies can use when conducting international trade, and these methods include open account terms and capital financing. Starting with open account terms, it is a method of finance that fits well in international trade, especially where the process involves trustworthy or regular clients. This method allows commodities to be delivered to clients and paid later on a monthly basis or depending on the agreement. If the transaction involves large amounts of products, then the clients are required to make a down payment or deposit and later pay the remaining amount at the agreed time. On the other hand, a company can choose to use capital financing method where the working capital of the company can be fully or partially financed with short or long-term loans which are granted beyond the banker's acceptance period (Global Trade Funding, 2019). The company can henceforth use the loan to finance its working capital cycle, which starts with the purchase of required goods or inventories. However, both are significant methods of financing that companies can opt to.
Examine the advantages and disadvantages of financing with a portfolio of currencies.
On the contrary, companies can also consider using a portfolio of currencies as their financing method, but there are some advantages and disadvantages as outlined below. One of the advantages with this strategy is that it aims at getting profit from other trends that are not related to other asset classes, hence generating a return series which are in any way not correlated to the returns from other asset class. The strategy also aims at taking advantage of the valuation that is perceived from differentials across the currency pairs (Chen, 2020). On the disadvantage side, it is believed that it can cause dilution. Additionally, the company is also at the risk of reducing its profit margins in the process of conversion.
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Provide two (2) examples of how companies or MNCs finance international transactions by using their own "bank" or by keeping currencies on hand (marketable securities).
Two significant examples that MNCs or companies can use when financing international transactions using their bank or by keeping currencies at hand is though current assets as well as current liabilities that are readily available in the capital. Cash is one form of current assets that can be used when financing international transactions. They can also be financed using short-term loans which serve as the current liabilities.
Analyze internal control over funds and two (2) methods for external short-term financing.
Whether big or small companies, internal control over funds is essential in the nature that it involves control measures for the receipt and running cash around the business, which prevents loss due to either fraud by employees or accounting errors. The controls are meant to limit those who access the cash and confirm that all the refunds, receipts as well as transfers are recorded accordingly on time. One method of external short-term financing includes trade credit, which involves the process of purchasing supplies and materials on credit from other firms, which are later recorded as an account payable at the agreed time. The other method is the commercial bank loans which involve the process of banks' lending money to businesses after carefully studying its working capital cycle and past track record. The loans are later paid in small installments or as agreed.
Determine the primary way they all affect a company's short-term financing decision. Support your response with one (1) example of how internal control over funds and external short-term financing methods affect a company's financing decision.
Internal control over funds, as well as the other two methods of external short-term financing, affects a company's financial decision in terms of profit margin or interest. Most external funding sources usually require a return on their investments, which is through funding. A good example is a burden they put on the company to employ someone who will secure the external funding as a full-time job which will also reduce the profit margin.
Provide two (2) examples that demonstrate an enhancement or change in your own theories of international finance since the beginning of this course. Rate the three (3) most important concepts that you learned in this course in order of importance, with one (1) being the most important and three (3) the least. Provide a rationale for your ratings.
A monetary relation between two or more countries is what is referred to as international finance, which is a branch of financial economics. Two examples that demonstrate an enhancement in the theory of international finance include topics such as international monetary systems as well as currency exchange rates, including international financial management such as political and exchange risks.
The most important concepts learned in this course include risk management, which is an essential concept when it comes to international finance since most of the securities are exposed to price risk as well as interest rate risk. The other one is hedging, which serves as one of the best techniques used in minimizing the risk related to earnings and cash flows. Finally, the cost of capital is the third important concept which is recognized as the minimum required rate of returns which a company should earn as a way of recovering all its cost of financing.
Rate the three most important concepts that you learned in this course in order of importance (one being the most important; three, the least). Provide a rationale for your ratings.
The three most important concepts that I have found to be more important include budgeting, reporting, and cash flow management. In my opinion, budgeting is the number one on the list since it eliminates any room of spending money without a plan, which could lead to overspending. Reporting is the next in my list since it will cover daily reports of the required data, which will be used in decision making. Finally, cash flow management is the last one and also important since it helps in proper planning for the money hence being able to run the daily activities of the business.
Propose two applications of knowledge that you have learned in this course to your current or a future position.
Number one is a corporate governance and financial integrity, which I will probably apply in my future career. As a financial manager, I will ensure financial integrity is at its best since being ethical is an important part that will help maintain transparency and avoid fraud and financial errors. Proper corporate governance will help in account management and reporting mechanisms.
References
Chen, J. (2020). International portfolio. Investopedia . https://www.investopedia.com/terms/i/international-portfolio.asp
Global Trade Funding. (2019). Open accounts: Import financing with open accounts benefits importers . https://globaltradefunding.com/trade-finance-solutions/import-financing/open-accounts/
