1、1Chapter 9 International Cash Management2Objectives This chapter emphasizes the decisions involved in management of cash by an MNC. The additional opportunities and risks of cash management for an MNC versus a domestic firm should be stressed. The specific objectives are:3Objectives to explain the d
2、ifference between a subsidiary perspective and a parent perspective in analyzing cash flows; to explain the various techniques used to optimize cash flows; to explain common complications in optimizing cash flows; and to explain the potential benefits and risks of foreign investments.4Cash Flow Anal
3、ysis:Subsidiary Perspective The management of working capital has a direct influence on the amount and timing of cash flow : inventory management accounts receivable management cash management5Cash Flow Analysis:Subsidiary PerspectiveSubsidiary Expenses International purchases of raw materials or su
4、pplies are more likely to be difficult to manage because of exchange rate fluctuations, quotas, etc. a larger inventory is thus required by MNC compared with domestic firms. If the sales volume is highly volatile, larger cash balances may need to be maintained in order to cover unexpected demands.6C
5、ash Flow Analysis:Subsidiary PerspectiveSubsidiary Revenue International sales are more likely to be volatile because of exchange rate fluctuations, business cycles, etc. Looser credit standards may increase sales (accounts receivable), though often at the expense of slower cash inflows.7Cash Flow A
6、nalysis:Subsidiary PerspectiveSubsidiary Dividend Payments Forecasting cash flows will be easier if the dividend payments and fees (royalties and overhead charges) to be sent to the parent are known in advance and denominated in the subsidiarys currency.8Cash Flow Analysis:Subsidiary PerspectiveSubs
7、idiary Liquidity Management After accounting for all cash outflows and inflows, the subsidiary must either invest its excess cash or borrow to cover its cash deficiencies. If the subsidiary has access to lines of credit and overdraft facilities, it may maintain adequate liquidity without substantial
8、 cash balances. 9Centralized Cash Management While each subsidiary is managing its own working capital, a centralized cash management group is needed to monitor, and possibly manage, the parent-subsidiary and intersubsidiary cash flows. (Exhibit 9.1) International cash management can be segmented in
9、to two functions: optimizing cash flow movements, and investing excess cash.10Exhibit 9.1 Cash Flow of the Overall MNCparentShort-term SecuritiesLong-termProjectsSources of DebtStockholdersSubsidiary “1”Subsidiary “2”Interest and Principal on Excess Cash Invested by SubsidiaryLoans or InvestmentFees
10、 and Part of EarningsExcess Cash to be InvestedExcess Cash to be InvestedFees and Part of EarningsLoans or InvestmentInterest and principal on Excess Cash Invested by SubsidiaryFunds for SuppliesFunds for Supplies Purchase of SecuritiesFunds Received fromSales of SecuritiesLong-term InvestmentReturn
11、 on InvestmentLoansRepayment on LoansFunds Received from New Stock IssuesCash Dividends11Centralized Cash Management The centralized cash management division of an MNC cannot always accurately forecast the events that may affect parent- subsidiary or intersubsidiary cash flows. It should, however, b
12、e ready to react to any event by considering any potential adverse impact on cash flows, and how to avoid such adverse impact.12Techniques to OptimizeCash FlowsAccelerating Cash Inflows The more quickly the cash inflows are received, the more quickly they can be invested or used for other purposes.
13、Common methods include the establishment of lockboxes around the world (to reduce mailing time) and preauthorized payments (direct charging of a customers bank account)13Techniques to OptimizeCash Flows Lockboxes is a service offered by banks to companies in which the company receives payments by ma
14、il to a post office box and the bank picks up the payments several times a day, deposits them into the companys account, and notifies the company of the deposit. This enables the company to put the money to work as soon as its received, but the amounts must be large in order for the value obtained t
15、o exceed the cost of the service.14Techniques to OptimizeCash FlowsMinimizing Currency Conversion Costs Netting reduces administrative and transaction costs through the accounting of all transactions that occur over a period to determine one net payment. A bilateral netting system involves transacti
16、ons between two units, while a multilateral netting system usually involves more complex interchanges.15Techniques to OptimizeCash Flows Note that MNCs commonly monitor the cash flows between their subsidiaries with the use of an intersubsidiary payment matrix. Example: Exhibit 9.2 Exhibit 9.316Exhi
17、bit 9.2 Intersubsidiary Payments Matrix Payments Owed U.S. $ Value (in Thousands ) Owed by Subsidiary to Subsidiary Located in: Located in: Canada France Japan Switzerland U.S. Canada 40 90 20 40 France 60 30 60 50 Japan 100 30 20 30 Switzerland 10 50 10 50 U.S. 10 60 20 20 17Exhibit 9.3 Netting Sch
18、edule Net Payments Net U.S. Dollar Value (in Thousands) to be made owed to Subsidiaryby Subsidiary Located in: Located in: Canada France Japan Switzerland U.S. Canada 0 0 10 30 France 20 0 10 0 Japan 10 0 10 10 Switzerland 0 0 0 30 U.S. 0 10 0 0 18Techniques to OptimizeCash FlowsManaging Blocked Fun
19、ds A government may require that funds remain within the country in order to create jobs and reduce unemployment. The MNC should then reinvest the excess funds in the host country, adjust the transfer pricing policy (such that higher fees have to be paid to the parent), borrow locally rather than fr
20、om the parent, etc.19Techniques to OptimizeCash FlowsManaging Intersubsidiary Cash Transfers A subsidiary with excess funds can provide financing by paying for its supplies earlier than is necessary. This technique is called leading. Alternatively, a subsidiary in need of funds can be allowed to lag
21、 its payments. This technique is called lagging.20Complicationsin Optimizing Cash FlowsCompany-Related Characteristics When a subsidiary delays its payments to the other subsidiaries, the other subsidiaries may be forced to borrow until the payments arrive.Government Restrictions Some governments ma
22、y prohibit the use of a netting system, or periodically prevent cash from leaving the country.21Complicationsin Optimizing Cash FlowsCharacteristics of Banking Systems The abilities of banks to facilitate cash transfers for MNCs may vary among countries. The banking systems in different countries us
23、ually differ too.22Investing Excess Cash Excess funds can be invested in domestic or foreign short-term securities, such as Eurocurrency deposits, treasury bills, and commercial papers. Sometimes, foreign short-term securities have higher interest rates . However, firms must also account for the pos
24、sible exchange rate movements.23Investing Excess CashCentralized Cash Management Centralized cash management allows for more efficient usage of funds and possibly higher returns. When multiple currencies are involved, a separate pool may be formed for each currency. The investment securities may als
25、o be denominated in the currencies that will be needed in the future.24Investing Excess CashDetermining the Effective Yield The effective rate for foreign investments rf = ( 1 + if ) ( 1 + ef ) 1where if = the quoted interest rate(deposit rate) on the investment ef = the % D in the spot rate If the
26、foreign currency depreciates over the investment period, the effective yield will be less than the quoted rate. *(Example: P503-504)25Investing Excess CashImplications of Interest Rate Parity (IRP) A foreign currency with a high interest rate will normally exhibit a forward discount that reflects th
27、e differential between its interest rate and the investors home interest rate. However, short-term foreign investing on an uncovered basis may still result in a higher effective yield.26Investing Excess CashUse of the Forward Rate as a Forecast If IRP exists, the forward rate can be used as a break-
28、even point to assess the short-term investment decision. The effective yield will be higher if the spot rate at maturity is more than the forward rate at the time the investment is undertaken, and vice versa. The key implications of IRP and the forward rate as a predicator of future spot rate for fo
29、reign investing are summarized in the following:27Considerations When Investing Excess CashIRP holds? Scenario Type of investment Investment yield Yes Covered Similar Yes Forward rate accurately Uncovered Similar predicts future spot rate Yes Forward rate forecasts future Uncovered Similar on spot r
30、ate with no bias average Yes Forward rate overestimates Uncovered Lower future spot rate Yes Forward rate underestimates Uncovered Higher future spot rate No Forward premium(discount) Covered Higher exceeds (is less than) interest rate differential No Forward premium (discount) Covered Lower is less
31、 than (exceeds) interest rate differential28Investing Excess CashUse of Exchange Rate Forecasts Given an exchange rate forecast, the expected effective yield of a foreign investment can be computed, and then compared with the local investment yield. (Example:P506) It may be useful to use probability
32、 distributions instead of point estimates, or to compute the break-even exchange rate that will equate foreign and local yields. (Example:P507-508)29Investing Excess CashDiversifying Cash Across Currencies If an MNC is not sure of how exchange rates will change over time, it may prefer to diversify
33、its cash among securities that are denominated in different currencies. The degree to which such a portfolio will reduce risk depends on the correlations among the currencies.30Investing Excess CashUse of Dynamic Hedging to Manage Cash Dynamic hedging refers to the strategy of hedging when the curre
34、ncies held are expected to depreciate, and not hedging when they are expected to appreciate. The overall performance is dependent on the firms ability to accurately forecast the direction of exchange rate movements.31Topics for Class Discussion Should international cash management be conducted at th
35、e subsidiary level or at the centralized level? Elaborate. What is the use of netting to an MNC? How can firm deal with blocked funds? Assume that as a treasurer of a U.S. corporation, you believe that the British pounds forward rate is an accurate forecast of the pounds future spot rate. What does
36、this imply about your decision of whether to invest cash in the U.S. or in the U.K.?32Questions and Applications*1. Discuss the general functions involved in International Cash Management.*2. What is “netting” and how can it improve an MNCs performance?*3. How can an MNC implement leading and laggin
37、g techniques to help subsidiaries in need of funds?33Questions and Applications*4. How can a centralized cash management system be beneficial to the MNC? 5. Evansville, Inc., has $2 million in cash available for 90 days. It is considering the use of covered interest arbitrage, since the euros 90-day
38、 interest rate is higher than the U.S. interest rate. What will determine whether this strategy is feasible?34Questions and Applications 6. Dallas Co. Has determined that the interest rate on euros is 16 percent while the U.S. interest rate is 11 percent for one-year treasury bills. The one-year for
39、ward rate of the euro has a discount of 7 percent. Does interest rate parity exist? Can Dallas achieve a higher effective yield by using covered interest arbitrage than by investing in U.S. Treasury bills? Explain. 35Questions and Applications 7. Fort Collins, Inc., has $1 million in cash available
40、for 30 days. It can earn 1 percent on a 30-day investment in the United States. Alternatively, if it converts the dollar to Mexican pesos, it can earn 1 percent on a Mexican deposit. The spot rate of the Mexican Peso is $.12. The spot rate 30 days from now is expected to be $.10. Should Fort Collins
41、 invest its cash in the United States or in Mexico? Substantiate your answer.36Questions and Applications 8. Assume that the one-year U.S. interest rate is 10 percent and the one-year Canadian interest rate is 13 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadi
42、an dollar have to depreciate to make its effective yield the same as the U.S. interest rate from the U.S. firms perspective?37Questions and Applications 9. Pittsburgh Co. Plans to invest its excess cash in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability
43、of the pesos percentage change in value during the next year is shown below: Possible Rate of Change in the Mexican Peso over Probability of the Life of the Investment Occurrence -15% 20% - 4% 50% 0 30%38Questions and Applications What is the expected value of the effective yield based on this information? Given that the U.S. interest rate for one year is 7 percent, what is the probability that a one- year investment in pesos will generate a lower effective yield than could be generated if Pittsburgh Co. simply invested domestically?
