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1、1,Chapter 9,International Cash Management,1Chapter 9 International Cash,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
2、 are:,2Objectives This chapter em,3,Objectives,to explain 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; andto explain the potenti
3、al benefits and risks of foreign investments.,3Objectivesto explain the diff,4,Cash Flow Analysis:Subsidiary Perspective,The management of working capital has a direct influence on the amount and timing of cash flow :inventory managementaccounts receivable managementcash management,4Cash Flow Analys
4、is:Subsidiar,5,Cash Flow Analysis:Subsidiary Perspective,Subsidiary ExpensesInternational purchases of raw materials 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 th
5、e sales volume is highly volatile, larger cash balances may need to be maintained in order to cover unexpected demands.,5Cash Flow Analysis:Subsidiar,6,Cash Flow Analysis:Subsidiary Perspective,Subsidiary RevenueInternational sales are more likely to be volatile because of exchange rate fluctuations
6、, business cycles, etc.Looser credit standards may increase sales (accounts receivable), though often at the expense of slower cash inflows.,6Cash Flow Analysis:Subsidiar,7,Cash Flow Analysis:Subsidiary Perspective,Subsidiary Dividend PaymentsForecasting cash flows will be easier if the dividend pay
7、ments and fees (royalties and overhead charges) to be sent to the parent are known in advance and denominated in the subsidiarys currency.,7Cash Flow Analysis:Subsidiar,8,Cash Flow Analysis:Subsidiary Perspective,Subsidiary Liquidity ManagementAfter accounting for all cash outflows and inflows, the
8、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 cash balances.,8Cash Flow Analysis:Subsidiar,9,Centralized Cash Management,While eac
9、h 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 into two functions:optimizing cash flow movements, andinv
10、esting excess cash.,9Centralized Cash ManagementWh,10,Exhibit 9.1 Cash Flow of the Overall MNC,parent,Short-term Securities,Long-termProjects,Sources of Debt,Stockholders,Subsidiary “1”,Subsidiary “2”,Interest and Principal on Excess Cash Invested by Subsidiary,Loans or Investment,Fees and Part of E
11、arnings,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 fromSales of Securities,Long-term Investment,Return on
12、Investment,Loans,Repayment on Loans,Funds Received from New Stock Issues,Cash Dividends,10Exhibit 9.1 Cash Flow of the,11,Centralized Cash Management,The centralized cash management division of an MNC cannot always accurately forecast the events that may affect parent- subsidiary or intersubsidiary
13、cash flows.It should, however, be ready to react to any event by consideringany potential adverse impact on cash flows, andhow to avoid such adverse impact.,11Centralized Cash ManagementT,12,Techniques to OptimizeCash Flows,Accelerating Cash InflowsThe more quickly the cash inflows are received, the
14、 more 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),12Techniques to OptimizeCash,13,Techniques to OptimizeCash Flows,Lock
15、boxes is a service offered by banks 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
16、work as soon as its received, but the amounts must be large in order for the value obtained to exceed the cost of the service.,13Techniques to OptimizeCash,14,Techniques to OptimizeCash Flows,Minimizing Currency Conversion CostsNetting reduces administrative and transaction costs through the account
17、ing of all transactions that occur over a period to determine one net payment.A bilateral netting system involves transactions between two units, while a multilateral netting system usually involves more complex interchanges.,14Techniques to OptimizeCash,15,Techniques to OptimizeCash Flows,Note that
18、 MNCs commonly monitor the cash flows between their subsidiaries with the use of an intersubsidiary payment matrix. Example: Exhibit 9.2 Exhibit 9.3,15Techniques to OptimizeCash,16,Exhibit 9.2 Intersubsidiary Payments Matrix,Payments Owed U.S. $ Value (in Thousands ) Owed by Subsidiary to Subsidiary
19、 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 ,16Exhibit 9.2 Intersubsidiar,17,Exhibit 9.3 Netting Schedule,Net Payments Net U.S. Dollar Value (in Thousands) to be made owed to Subsidiar
20、yby 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 ,17Exhibit 9.3 Netting Schedu,18,Techniques to OptimizeCash Flows,Managing Blocked FundsA government may require that funds remain within
21、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 from the parent, etc.,18Techniques to OptimizeCash,19,Te
22、chniques to OptimizeCash Flows,Managing Intersubsidiary Cash TransfersA 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 its payments. This tech
23、nique is called lagging.,19Techniques to OptimizeCash,20,Complicationsin Optimizing Cash Flows,Company-Related CharacteristicsWhen a subsidiary delays its payments to the other subsidiaries, the other subsidiaries may be forced to borrow until the payments arrive.Government RestrictionsSome governme
24、nts may prohibit the use of a netting system, or periodically prevent cash from leaving the country.,20Complicationsin Optimizing,21,Complicationsin Optimizing Cash Flows,Characteristics of Banking SystemsThe abilities of banks to facilitate cash transfers for MNCs may vary among countries.The banki
25、ng systems in different countries usually differ too.,21Complicationsin Optimizing,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 securities have hi
26、gher interest rates . However, firms must also account for the possible exchange rate movements.,22Investing Excess CashExcess,23,Investing Excess Cash,Centralized Cash ManagementCentralized cash management allows for more efficient usage of funds and possibly higher returns.When multiple currencies
27、 are involved, a 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.,23Investing Excess CashCentral,24,Investing Excess Cash,Determining the Effective YieldThe effective rate for foreign investments rf
28、= ( 1 + if ) ( 1 + ef ) 1where if = the quoted interest rate(deposit rate) on the investment ef =the % D in the spot rateIf the foreign currency depreciates over the investment period, the effective yield will be less than the quoted rate. *(Example: P503-504),24Investing Excess CashDetermi,25,Inves
29、ting Excess Cash,Implications of Interest Rate Parity (IRP) A foreign currency 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
30、may still result in a higher effective yield.,25Investing Excess CashImplica,26,Investing Excess Cash,Use of the Forward Rate as a ForecastIf 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 rat
31、e 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 foreign investing are summarized in the following:,26Investing Excess CashUse of,27,Considerations When Inves
32、ting Excess Cash,IRP 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 rate with no bias average Yes Forward rate overestimates Uncovered Lower fu
33、ture 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 than (exceeds) interest rate differential,27Considerations When Investin,
34、28,Investing Excess Cash,Use of Exchange Rate ForecastsGiven 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 distributions instead of point estimates,
35、 or to compute the break-even exchange rate that will equate foreign and local yields. (Example:P507-508),28Investing Excess CashUse of,29,Investing Excess Cash,Diversifying Cash Across CurrenciesIf an MNC is not sure of how exchange rates will change over time, it may prefer to diversify its cash a
36、mong securities that are denominated in different currencies. The degree to which such a portfolio will reduce risk depends on the correlations among the currencies.,29Investing Excess CashDiversi,30,Investing Excess Cash,Use of Dynamic Hedging to Manage CashDynamic hedging refers to the strategy of
37、 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.,30Investing Excess CashUse of,31,Topics for Class Discussion,S
38、hould 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 pounds forward rate is an accurate
39、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.?,31Topics for Class DiscussionS,32,Questions and Applications,*1. Discuss the general functions involved in International Cash Management.*2. What is “netting” and h
40、ow can it improve an MNCs performance?*3. How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?,32Questions and Applications*1,33,Questions and Applications,*4. How can a centralized cash management system be beneficial to the MNC? 5. Evansville, Inc., has $2
41、 million in cash available 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?,33Questions and Applications*4,34,Questions and Applications,6. Dallas C
42、o. 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 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 int
43、erest arbitrage than by investing in U.S. Treasury bills? Explain.,34Questions and Applications,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 doll
44、ar 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 invest its cash in the United States or in Mexico? Substantiate your answer.,35Questions and Applications,36,Question
45、s 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 Canadian dollar have to depreciate to make its effective yield the same as the U.S. interest
46、rate from the U.S. firms perspective?,36Questions and Applications,37,Questions 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 of the pesos percentage change in value during the next
47、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%,37Questions and Applications,Thank you,Thank you,39,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?,39Questions and Applications,谢谢大家！,谢谢大家！,谢谢大家！,谢谢大家！,
