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International Cash Management

21. International Cash Management. Chapter Objectives This chapter will: A. Explain working capital management from a subsidiary perspective versus a parent perspective B. Explain the various techniques used to optimize cash flows

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International Cash Management

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  1. 21 International Cash Management Chapter Objectives This chapter will: A. Explain working capital management from a subsidiary perspective versus a parent perspective B. Explain the various techniques used to optimize cash flows C. Explain the decision to invest cash internationally 2

  2. Multinational Working Capital Management • Subsidiary Expenses • Subsidiary Revenue • Subsidiary Dividend Payment • Subsidiary Liquidity Management

  3. Centralized Cash Management • Decentralized management is not optimal because it will force MNC to maintain larger cash investment than necessary. • Accommodating cash shortages by transferring cash from subsidiaries with excess funds to those that need funds. • Technology used to facilitate fund transfers • Monitoring of cash positions

  4. Exhibit 21.1 Cash Flow of the Overall MNC 5

  5. Techniques to Optimize Cash Flows • Accelerating Cash Inflows using lockboxes and preauthorized payments. • Minimizing currency conversion costs by netting, using a bilateral netting system or a multilateral netting system. • Managing blocked funds by incurring costs within the country or using transfer pricing. • Managing intersubsidiary cash transfers by using a leading or lagging strategy.

  6. Complications in Optimizing Cash Flow • Company related characteristics • Government restrictions • Characteristics of the banking system

  7. Investing Excess Cash • Determining the Effective Yield: a quicker method r = (1 + if)(1 + ef) – 1 where r = effective yield on foreign deposit, if = quoted interest rate, ef= percentage change in value of currency

  8. Investing Excess Cash • Implications of interest rate parity: Short term investing can be done on uncovered basis if IRP holds. • Use of forward rate as a forecast • Forward rate serves as a break-even point to assess short term investment decision. • Relationship with International Fisher Effect: if IRP holds and forward rate is an unbiased predictor of future spot rate, then we can expect IFE to hold.

  9. Use of Exchange Rate Forecasts • Deriving the ef that equates foreign and domestic yields • Use of probability distributions.

  10. Investing Excess Cash • Diversifying cash across currencies to limit the percentage of excess cash invested in each currency. • Dynamic hedging: strategy of applying a hedge when the currencies held are expected to depreciate and removing the hedge when the currencies held are expected to appreciate.

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