Multinational Cash Management Chapter Eighteen Chapter Objective 18

Multinational Cash Management Chapter Eighteen Chapter Objective: 18 INTERNATIONAL FINANCIAL MANAGEMENT This chapter discusses various issues associated with multinational cash management. Second Edition EUN / RESNICK

Chapter Outline l l The Management of Multinational Cash Balances Cash Management Systems in Practice Transfer Pricing & Related Issues Blocked Funds Mc. Graw-Hill/Irwin 1 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Management of International Cash Balances l l l The size of cash balances The currency denomination Where these cash balances are located Mc. Graw-Hill/Irwin 2 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

The Size of Cash Balances l The optimal size of the firm’s cash balances depend upon: n. The cost of keeping “too much” cash on hand. ui. e. n. The cost of not keeping enough cash on hand. ui. e. n. The the opportunity costs of holding cash the trading costs associated with having too little cash variability of cash flows. Mc. Graw-Hill/Irwin 3 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Choice of Currency l By maintaining cash balances in a particular currency, the MNC is essentially speculating (or hedging? ) in that currency. Mc. Graw-Hill/Irwin 4 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Where Cash Balances are Located. l l l Should the firm have centralized cash management in the home country? Or should the firm let each affiliate handle it locally? Where are borrowing costs lowest and investment returns highest? Mc. Graw-Hill/Irwin 5 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Cash Management Systems in Practice l Multilateral Netting n l Is an efficient and cost-effective mechanism for settling interaffiliate foreign exchange transactions. Not all countries allow MNCs to net payments n By limiting netting, more unnecessary foreign exchange transactions flow through the local banking system. Mc. Graw-Hill/Irwin 6 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider a U. S. MNC with three subsidiaries and the following foreign exchange transactions: $20 $30 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 7 $30 $40 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $20 $30 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 8 $30 $40 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 9 $30 $40 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 10 $30 $40 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 11 $10 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $20 $30 Mc. Graw-Hill/Irwin 12 $10 $60 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $10 $60 $10 Mc. Graw-Hill/Irwin 13 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $10 $35 $10 $25 $10 $60 $10 Mc. Graw-Hill/Irwin 14 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $25 $10 $60 $10 Mc. Graw-Hill/Irwin 15 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $40 $25 $10 $60 $10 Mc. Graw-Hill/Irwin 16 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $25 $20 $10 $25 $10 Mc. Graw-Hill/Irwin 17 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $25 $20 $10 $25 $10 Mc. Graw-Hill/Irwin 18 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Bilateral Netting would reduce the number of foreign exchange transactions by half: $10 $25 $10 $10 Mc. Graw-Hill/Irwin 19 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $25 $10 $10 Mc. Graw-Hill/Irwin 20 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $20 $15 $10 $10 Mc. Graw-Hill/Irwin 21 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $20 $15 $10 Mc. Graw-Hill/Irwin 22 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $20 $15 $10 Mc. Graw-Hill/Irwin 23 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $30 $15 Mc. Graw-Hill/Irwin 24 $15 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $30 $15 Mc. Graw-Hill/Irwin 25 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $30 $15 Mc. Graw-Hill/Irwin 26 $15 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 Mc. Graw-Hill/Irwin 27 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 Mc. Graw-Hill/Irwin 28 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $10 $15 $30 Mc. Graw-Hill/Irwin 29 $10 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $30 $10 Mc.

Multilateral Netting Consider simplifying the bilateral netting with multilateral netting: $15 $40 Mc. Graw-Hill/Irwin

Multilateral Netting Clearly, multilateral netting can simplify things greatly. $15 $40 Mc. Graw-Hill/Irwin 33

Multilateral Netting Compare this: $20 $30 $40 $10 $35 $10 $25 $20 $30 Mc.

Multilateral Netting With this: $15 $40 Mc. Graw-Hill/Irwin 35 Copyright © 2001 by The

Transfer Pricing & Related Issues l l The Transfer Price is the price that for accounting purposes, is assigned to goods and services flowing from one division of a firm to another division. Controversial for a domestic firm n Consider the example of a firm that has one division that mills lumber and another that makes furniture. The transfer price of the lumber is a political as well as economic and accounting issue. Mc. Graw-Hill/Irwin 36 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Transfer Pricing & Related Issues l For MNC, there exists the added complications of: n. Differences n. Import in tax rates. duties and quotas. n. Exchange rate restrictions on the part of the host country. Mc. Graw-Hill/Irwin 37 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Blocked Funds l l A form of political risk is the risk that the foreign government may impose exchange restrictions on its own currency. Several methods exist for moving blocked funds: n. Transfer pricing n. Unbundling services n. Parallel and back-to-back loans n. Swaps Mc. Graw-Hill/Irwin 38 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Blocked Funds l Additional strategies for unblocking funds: n. Direct n. Export negotiation creation u. Using the blocked funds to buy goods and services for the MNC. u. For example, use the National Airlines of the host country for travel of executives of the MNC, and pay for the tickets with the blocked funds. u. Transfer local expatriates from home payroll to the local subsidiaries payroll. Mc. Graw-Hill/Irwin 39 Copyright © 2001 by The Mc. Graw-Hill Companies, Inc. All rights reserved.