Management Of The Short-Term Investment Portfolio

A major task of international cash management is to determine the levels and currency denominations of the multinational group‘s investment in cash balances and money market instruments. Firms with seasonal or cyclical cash flows have special problems, such as spacing investment maturities to coincide with projected needs. To manage, this investment properly requires (a) a forecast of future cash needs based on the company‘s current budget and past experience and (b) an estimate of a minimum cash position for the coming period.  Successful management of an MNC’s required cash balances and of any excess funds generated by the firm and its affiliates depends largely on the astute selection of appropriate short-term money market instruments. Rewarding opportunities exist in many countries, but the choice of an investment medium depends on government regulations, the structure of the market, and the tax laws, all of which vary widely.  Available money instruments differ among the major markets, and at times, foreign firms are denied access to existing investment opportunities.  Only a few markets, such as the broad and diversified U.S. market and the Eurocurrency markets, are truly free and international. Common-sense guidelines for globally managing the marketable securities portfolio are as follows.

• Diversify the instruments in the portfolio to maximize the yield for a given level of risk. Don‘t invest only in government securities. Eurodollar and other instruments may be nearly as safe.
• Review the portfolio daily to decide which securities should be liquidated and what new investment should be made.
• In revising the portfolio, make sure that incremental interest earned more than compensates for such added costs clerical work, the income lost between investments, fixed charges such as the foreign exchange spread, and commission on the sale and purchase of securities.
• If rapid conversion to cash is an important consideration, then carefully evaluate the security‘s marketability (liquidity). Ready markets exist for some securities, but not for others.
• Tailor the maturity of the investment to the firm‘s projected cash needs. Or a secondary market with high liquidity should exist.
• Carefully consider opportunities for covered or uncovered interest arbitrage