Chapter 17 Managing Multinational Cash Flows

1. Chapter 17Managing Multinational Cash Flows • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

2. Learning Objectives • Have an appreciation of the development of the current exchange rate system. • Understand the basic driving forces causing exchange rates to fluctuate. • Gain a basic understanding of the various means by which firms create internal structures to manage exchange rate fluctuations. • Have an appreciation for the differences between the U.S. and foreign banking systems.

3. Exchange Rates • Fixed versus floating • Spot rates • Forward rates • Futures rates

4. Foreign Exchange Quotes • Spot and forward rate quotesUS $ equivBritish (Pound) 1.8486 30-Day Forward 1.8443 90-Day Forward 1.8355 180-Day Forward 1.8219Japan (Yen) .009401 30-Day Forward .009411 90-Day Forward .009428 180-Day Forward .009455Switzerland (Franc) .8195 30-Day Forward .8202 60-Day Forward .8213 180-Day Forward .8230

5. Factors Affecting Exchange Rates • Relative level of interest rates in one country compared to another • Relative rate of inflation in one country compared to another • Government’s central bank reaction to changes in exchange rates caused by economic circumstances • Economic and political factors

6. Foreign Exchange Exposure • Economic exposure • the possibility that the long-term net present value of a firm’s expected cash flows will change due to unexpected changes in exchange rates • Transaction exposure • the gains or losses associated with the settlement of business transactions denominated in different currencies • Translation exposure • results when the balance sheet and income statement of a foreign subsidiary are translated into the parent company’s domestic currency for consolidated financial reporting purposes

7. Corporate Structure for Global Liquidity Management • Centralize or not? The evidence is that financial executives are… • building global liquidity pyramids that consolidate net cash positions at the national level, then the broad regional level, and finally at the enterprise level, • leveraging capacity of their ERP systems and treasury work stations to get timely cash balance reports system wide, and • reducing number of banks in their system. • Survey results of U.S.-based firms have centralized their treasury structures with 30% fully centralized and 62% centrally coordinating treasury functions from HQ.

8. Managing Foreign Exchange Exposure • Avoidance • Leading and Lagging • Netting • Re-invoicing • Hedging

9. A Typical Multilateral Netting System Subsidiary A Net amount owed Subsidiary A Netting Agent Net amount Subsidiary B Subsidiary C Subsidiary B Subsidiary C Payment Flows Without Netting Net Payment Flows With Netting

10. Features of Non-US Banking Systems • Check clearing • Interest on demand deposits • Pooling • Governmental policies and restrictions • Cash management services

11. Summary • The chapter began with a brief history of exchange rate system. • Different forms of currency quotations were described including: spot, forward, and futures. • Three types of foreign exchange exposure were introduced including: economic, transaction, and translation exposure. • The chapter discussed a variety of techniques for managing foreign currency exposure. • Complicating factors of managing international cash flows including: different regulations, value dating, and fluctuating currency values.