Essay evaluating use of speculators and arbitrageurs to a treasury.

Essay by gavoUniversity, Bachelor's December 2003

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"Essay evaluating use of speculators and arbitrageurs to a treasury"

A multinational corporation is a business firm that operates in more than one country. An example of a multinational corporation could be an electronics company producing televisions. They may be designed in the UK, parts bought from Korea, China and Estonia and then assembled in Taiwan. These types of firms move a good bit of financial capital around the world.

Financial managers in the multinational corporations treasury department have the task of moving capital among nations. Treasuries look after the liquid resources of an organisation. This duty must be efficient and involve financial analysts working in international commercial banks, investment banks, pension fund, life insurance companies and mutual funds.

The management of liquid resources has become a very complex task. Multinational corporations treasuries require a wide range of methods to minimise foreign exchange risk. Treasuries need good relations with all types of financial institutions to borrow funds directly and to maintain confidence amongst current and potential investors.

Multinational corporations engage in foreign exchange transactions and are exposed to transaction exposure. For example, a firm in Vietnam wishes to import instant noodles form China. The firm in Vietnam may be expected to pay in Yuan. The problem is that, as the Vietnese company has agreed to the price in Yuan, there is a chance that the Dong will weaken against the Yuan in the intervening time between signing the contract, receiving the goods and paying the invoice. This would mean that the Vietnese company would have paid more for the Chinese goods in terms of Dong than they had envisaged when they had signed the contract. This would lead to a reduction in anticipated profits or possibly a loss on the transaction. The use of speculators or arbitrageurs could avoid this...