1、International Cash Management21 ChapterSouth-Western/Thomson Learning 2003C21 - 2Chapter ObjectivesTo 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

2、 in optimizing cash flows; andTo explain the potential benefits and risks of foreign investments.C21 - 3Cash Flow Analysis:Subsidiary PerspectiveThe management of working capital has a direct influence on the amount and timing of cash flow :inventory managementaccounts receivable managementcash mana

3、gementliquidity managementC21 - 4Subsidiary ExpensesInternational purchases of raw materials or supplies are more likely to be difficult to manage because of exchange rate fluctuations, quotas, etc.If the sales volume is highly volatile, larger cash balances may need to be maintained in order to cov

4、er unexpected inventory demands.Cash Flow Analysis:Subsidiary PerspectiveC21 - 5Subsidiary RevenueInternational 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 expen

5、se of slower cash inflows.Cash Flow Analysis:Subsidiary PerspectiveC21 - 6Subsidiary Dividend PaymentsForecasting 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.Cas

6、h Flow Analysis:Subsidiary PerspectiveC21 - 7Subsidiary Liquidity ManagementAfter 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

7、maintain adequate liquidity without substantial cash balances. Cash Flow Analysis:Subsidiary PerspectiveC21 - 8Centralized Cash ManagementWhile each subsidiary is managing its own working capital, a centralized cash management group is needed to monitor, and possibly manage, the parent-subsidiary an

8、d intersubsidiary cash flows. International cash management can be segmented into two functions:optimizing cash flow movements, andinvesting excess cash.C21 - 9Cash Flow of the Overall MNCSubsidiaryShort-TermSecuritiesLong-TermProjectsParentCash DividendsSourcesof DebtStock-holdersSubsidiaryFunds fo

9、rSuppliesInterest &/or PrincipalLoans or InvestmentFees & EarningsExcess CashFees & EarningsExcess CashInterest &/or PrincipalLoans or InvestmentPurchaseSaleLong-TermInvestmentReturn onInvestmentLoansRepaymentNew IssuesC21 - 10Centralized Cash ManagementThe centralized cash managemen

10、t division of an MNC cannot always accurately forecast the events that may affect parent- subsidiary or intersubsidiary 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 impacts.C21 - 11Techniques to O

11、ptimizeCash FlowsAccelerating Cash InflowsThe more quickly the cash inflows are received, the more quickly they can be invested or used for other purposes.Common methods include the establishment of lockboxes around the world (to reduce mail float) and preauthorized payments (direct charging of a cu

12、stomers bank account).C21 - 12Minimizing Currency Conversion CostsNetting reduces administrative and transaction costs through the accounting of all transactions that occur over a period to determine one net payment.A bilateral netting system involves transactions between two units, while a multilat

13、eral netting system usually involves more complex interchanges.Techniques to OptimizeCash FlowsC21 - 13Intersubsidiary Payments Matrix Canada France Japan Switzerland U.S.Canada40902040France60 306050Japan10030 2030Switzerland105010 50U.S.10602020 Thousands of US$ Owed to Subsidiary in:PaymentsMatri

14、x Canada France Japan Switzerland U.S.Canada001030France20 0100Japan100 1010Switzerland000 30U.S.01000 Net Thousands of US$ Owed:NettingScheduleC21 - 14Managing Blocked FundsA government may require that funds remain within the country in order to create jobs and reduce unemployment.The MNC should t

15、hen 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.Techniques to OptimizeCash FlowsC21 - 15Managing Intersubsidiary Cash TransfersA subsidiary with excess funds c

16、an 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 technique is called lagging.Techniques to OptimizeCash FlowsC21 - 16Complicationsin Optimizing Cash FlowsC

17、ompany-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 governments may prohibit the use of a netting system, or periodically prevent cash from leaving the coun

18、try.C21 - 17Characteristics of Banking SystemsThe abilities of banks to facilitate cash transfers for MNCs may vary among countries.The banking systems in different countries usually differ too.Complicationsin Optimizing Cash FlowsC21 - 18Investing Excess CashExcess funds can be invested in domestic

19、 or foreign short-term securities, such as Eurocurrency deposits, bills, and commercial papers.Sometimes, foreign short-term securities have higher interest rates. However, firms must also account for the possible exchange rate movements.C21 - 19Short-Term Interest Rates05101520251978198219861990199

20、41998200205101520251978198219861990199419982002U.K.JapanCanadaGermanyU.S.C21 - 20Centralized Cash ManagementCentralized cash management allows for more efficient usage of funds and possibly higher returns.When multiple currencies are involved, a separate pool may be formed for each currency. The inv

21、estment securities may also be denominated in the currencies that will be needed in the future.Investing Excess CashC21 - 21Determining the Effective YieldThe effective rate for foreign investments rf = ( 1 + if ) ( 1 + ef ) 1where if=the quoted interest rate on the investmentef=the % D in the spot

22、rateIf the foreign currency depreciates over the investment period, the effective yield will be less than the quoted rate.Investing Excess CashC21 - 22Implications of Interest Rate Parity (IRP) A foreign currency with a high interest rate will normally exhibit a forward discount that reflects the di

23、fferential 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.Investing Excess CashC21 - 23Use of the Forward Rate as a ForecastIf IRP exists, the forward rate can be used as a break-

24、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.Investing Excess CashC21 - 24Use of the Forward Rate as a Forecast* as compared to the yield

25、for domestic investmentsIRP holds?Investment yield*Type of InvestmentScenarioYesCoveredSimilarForward rate accuratelypredicts future spot rateYesUncoveredSimilarForward rate over-estimates future spot rateYesUncoveredLowerForward rate under-estimates future spot rateYesUncoveredHigherForward premium

26、(discount)exceeds (is less than)interest rate differentialNoCoveredHigherForward premium (discount)is less than (exceeds)interest rate differentialNoCoveredLowerForward rate forecastsfuture spot rate with no biasYesUncoveredSimilar onaverageC21 - 25Use of Exchange Rate ForecastsGiven an exchange rat

27、e forecast, the expected effective yield of a foreign investment can be computed, and then compared with the local investment yield.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.Inves

28、ting Excess CashC21 - 26Diversifying Cash Across CurrenciesIf an MNC is 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 correl

29、ations among the currencies.Investing Excess CashC21 - 27Use of Dynamic Hedging to Manage CashDynamic 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

30、ability to accurately forecast the direction of exchange rate movements.Investing Excess CashC21 - 28Online ApplicationC21 - 29Impact of International Cash Managementon an MNCs Valuenttmjtjtjk1=1 , ,1ER ECF E = ValueE (CFj,t ) = expected cash flows in currency j to be received by the U.S. parent at the end of period tE (ERj,t ) = expected exchange rate at which currency j c