1、1,Chapter 9,International Cash Management,2,Objectives,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:,3,Objectives,to explain
2、the difference 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.,4,Cash Fl
3、ow Analysis: 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 management,5,Cash Flow Analysis: Subsidiary Perspective,Subsidiary Expenses International purchases of raw mat
4、erials or supplies 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 unexpecte
5、d demands.,6,Cash Flow Analysis: Subsidiary Perspective,Subsidiary 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 infl
6、ows.,7,Cash Flow Analysis: Subsidiary Perspective,Subsidiary 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.,8,Cash Flow Analysis: Sub
7、sidiary Perspective,Subsidiary 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 liqui
8、dity without substantial cash balances.,9,Centralized Cash Management,While each subsidiary is managing its own working capital, a centralized cash management group is needed to monitor, and possiblymanage, the parent-subsidiary and intersubsidiary cash flows. (Exhibit 9.1) International cash manage
9、ment can be segmented into two functions: optimizing cash flow movements, and investing excess cash.,10,Exhibit 9.1 Cash Flow of the Overall MNC,parent,Short-term Securities,Long-term Projects,Sources of Debt,Stockholders,Subsidiary “1”,Subsidiary “2”,Interest and Principal on Excess Cash Invested b
10、y Subsidiary,Loans or Investment,Fees and Part of Earnings,Excess Cash to be Invested,Excess Cash to be Invested,Fees and Part of Earnings,Loans or Investment,Interest and principal on Excess Cash Invested by Subsidiary,Funds for Supplies,Funds for Supplies,Purchase of Securities,Funds Received from
11、 Sales of Securities,Long-term Investment,Return on Investment,Loans,Repayment on Loans,Funds Received from New Stock Issues,Cash Dividends,11,Centralized Cash Management,The centralized cash management division of an MNC cannot always accurately forecast the events that may affect parent- subsidiar
12、y or intersubsidiary cash flows. It should, however, be ready to react to any event by considering any potential adverse impact on cash flows, and how to avoid such adverse impact.,12,Techniques to Optimize Cash Flows,Accelerating Cash Inflows The more quickly the cash inflows are received, the more
13、 quickly they can be invested or used for other purposes. Common methods include the establishment of lockboxes around the world (to reduce mailing time) and preauthorized payments (direct charging of a customers bank account),13,Techniques to Optimize Cash Flows,Lockboxes is a service offered by ba
14、nks to companies in which the company receives payments by mail 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, bu
15、t the amounts must be large in order for the value obtained to exceed the cost of the service.,14,Techniques to Optimize Cash Flows,Minimizing Currency Conversion Costs Netting reduces administrative and transaction costs through the accounting of all transactions that occur over a period to determi
16、ne one net payment. A bilateral netting system involves transactions between two units, while a multilateral netting system usually involves more complex interchanges.,15,Techniques to Optimize Cash Flows,Note that MNCs commonly monitor the cash flows between their subsidiaries with the use of an in
17、tersubsidiary payment matrix.Example: Exhibit 9.2Exhibit 9.3,16,Exhibit 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 40France 60 30 60 50Japan 100 30 20 30Swi
18、tzerland 10 50 10 50U.S. 10 60 20 20 ,17,Exhibit 9.3 Netting Schedule,Net Payments Net U.S. Dollar Value (in Thousands) to be made owed to Subsidiary by Subsidiary Located in:Located in: Canada France Japan Switzerland U.S.Canada 0 0 10 30France 20 0 10 0Japan 10 0 10 10Switzerland 0 0 0 30U.S. 0 10
19、 0 0 ,18,Techniques to Optimize Cash Flows,Managing Blocked Funds 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 fee
20、s have to be paid to the parent), borrow locally rather than from the parent, etc.,19,Techniques to Optimize Cash Flows,Managing 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.
21、 Alternatively, a subsidiary in need of funds can be allowed to lag its payments. This technique is called lagging.,20,Complications in Optimizing Cash Flows,Company-Related Characteristics When a subsidiary delays its payments to the other subsidiaries, the other subsidiaries may be forced to borro
22、w until the payments arrive. Government Restrictions Some governments may prohibit the use of a netting system, or periodically prevent cash from leaving the country.,21,Complications in Optimizing Cash Flows,Characteristics of Banking Systems The abilities of banks to facilitate cashtransfers for M
23、NCs may vary among countries. The banking systems in different countries usually differ too.,22,Investing 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 securit
24、ies have higher interest rates . However, firms must also account for the possible exchange rate movements.,23,Investing Excess Cash,Centralized Cash Management Centralized cash management allows for more efficient usage of funds and possibly higher returns. When multiple currencies are involved, a
25、separate pool may be formed for each currency. The investment securities may also be denominated in the currencies that will be needed in the future.,24,Investing Excess Cash,Determining the Effective Yield The effective rate for foreign investmentsrf = ( 1 + if ) ( 1 + ef ) 1where if = the quoted i
26、nterest rate(deposit rate) on the investmentef = the % D in the spot rate If the foreign currency depreciates over the investment period, the effective yield will be less than the quoted rate.*(Example: P503-504),25,Investing Excess Cash,Implications of Interest Rate Parity (IRP) A foreign currency
27、with a high interest rate will normally exhibit a forward discount that reflects the 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.,26,Investing Excess Cash,Use of
28、the Forward Rate as a Forecast If IRP exists, the forward rate can be used as a break-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 ke
29、y implications of IRP and the forward rate as a predicator of future spot rate for foreign investing are summarized in the following:,27,Considerations When Investing Excess Cash,IRP holds? Scenario Type of investment Investment yieldYes Covered SimilarYes Forward rate accurately Uncovered Similarpr
30、edicts future spot rateYes Forward rate forecasts future Uncovered Similar on spot rate with no bias averageYes Forward rate overestimates Uncovered Lowerfuture spot rateYes Forward rate underestimates Uncovered Higherfuture spot rateNo Forward premium(discount) Covered Higherexceeds (is less than)
31、interest rate differentialNo Forward premium (discount) Covered Loweris less than (exceeds) interest ratedifferential,28,Investing Excess Cash,Use of Exchange Rate Forecasts Given an exchange rate forecast, the expected effective yield of a foreign investment can be computed, and then compared with
32、the local investment yield. (Example:P506) It may be useful to use probability distributions instead of point estimates, or to compute the break-even exchange rate that will equate foreign and local yields. (Example:P507-508),29,Investing Excess Cash,Diversifying Cash Across Currencies If an MNC is
33、not sure of how exchange rates will change over time, it may prefer to diversify 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.,30,Investing Excess Cash,Use of Dynamic Hed
34、ging to Manage Cash Dynamic hedging refers to the strategy of hedging when the currencies 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.,
35、31,Topics for Class Discussion,Should international cash management be conducted at the 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
36、pounds forward rate is an accurate forecast of the pounds future spot rate. What does this imply about your decision of whether to invest cash in the U.S. or in the U.K.?,32,Questions and Applications,*1. Discuss the general functions involved in International Cash Management. *2. What is “netting”
37、and how can it improve an MNCs performance? *3. How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?,33,Questions and Applications,*4. How can a centralized cash management system be beneficial to the MNC?5. Evansville, Inc., has $2 million in cash available
38、 for 90 days. It is considering the use of covered interest arbitrage, since the euros 90-day interest rate is higher than the U.S. interest rate. What will determine whether this strategy is feasible?,34,Questions and Applications,6. Dallas Co. Has determined that the interest rate on euros is 16 p
39、ercent while the U.S. interest rate is 11 percent for one-year treasury bills. The one-year forward 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?
40、 Explain.,35,Questions and Applications,7. Fort Collins, Inc., has $1 million in cash available 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
41、Mexican Peso is $.12. The spot rate 30 days from now is expected to be $.10. Should Fort Collins invest its cash in the United States or in Mexico? Substantiate your answer.,36,Questions and Applications,8. Assume that the one-year U.S. interest rate is 10 percent and the one-year Canadian interest
42、rate is 13 percent. If a U.S. firm invests its funds in Canada, by what percentage will the Canadian dollar have to depreciate to make its effective yield the same as the U.S. interest rate from the U.S. firms perspective?,37,Questions and Applications,9. Pittsburgh Co. Plans to invest its excess ca
43、sh in Mexican pesos for one year. The one-year Mexican interest rate is 19 percent. The probability 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%,
44、38,Questions 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?,
