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Click to edit Master title style,Click to edit Master text styles,Second level,Third level,Fourth level,Fifth level,McGraw-Hill/Irwin Copyright 2001 by The McGraw-Hill Companies, Inc. All rights reserved.,18-,*,INTERNATIONAL,FINANCIAL,MANAGEMENT,EUN / RESNICK,Second Edition,18,Chapter Eighteen,Multinational Cash Management,Chapter Objective:,This chapter discusses various issues associated with multinational cash management.,Chapter Outline,The Management of Multinational Cash Balances,Cash Management Systems in Practice,Transfer Pricing & Related Issues,Blocked Funds,1,The Management of International Cash Balances,The size of cash balances,The currency,denomination,Where,these cash balances are located,2,The Size of Cash Balances,The optimal size of the firms cash balances depend upon:,The cost of keeping “too much” cash on hand.,i.e.,the opportunity costs of,holding,cash,The cost of not keeping enough cash on hand.,i.e.,the trading costs associated with having,too little,cash,The variability of cash flows.,3,Choice of Currency,By maintaining cash balances in a particular currency, the MNC is essentially speculating (or hedging?) in that currency.,4,Where Cash Balances are Located.,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?,5,Cash Management Systems in Practice,Multilateral Netting,Is an efficient and cost-effective mechanism for settling interaffiliate foreign exchange transactions.,Not all countries allow MNCs to net payments,By limiting netting, more unnecessary foreign exchange transactions flow through the local banking system.,6,Multilateral Netting,Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions:,$10,$35,$40,$30,$20,$25,$60,$40,$10,$30,$20,$30,7,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$40,$30,$20,$25,$60,$40,$10,$30,$20,$30,8,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$40,$30,$25,$60,$40,$10,$10,$20,$30,9,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$40,$30,$25,$60,$40,$10,$10,$20,$30,10,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$10,$25,$60,$40,$10,$10,$20,$30,11,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$10,$25,$60,$40,$10,$10,$20,$30,12,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$10,$25,$60,$40,$10,$10,$10,13,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$10,$35,$10,$25,$60,$40,$10,$10,$10,14,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$25,$10,$25,$60,$40,$10,$10,$10,15,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$25,$10,$25,$60,$40,$10,$10,$10,16,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$25,$10,$25,$20,$10,$10,$10,17,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$25,$10,$25,$20,$10,$10,$10,18,Multilateral Netting,Bilateral Netting would reduce the number of foreign exchange transactions by half:,$25,$10,$15,$20,$10,$10,19,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$25,$10,$15,$20,$10,$10,20,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$20,$10,$10,$10,21,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$20,$10,$10,22,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$20,$10,$10,23,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$30,$10,24,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$30,$10,25,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$10,$15,$30,$10,26,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$10,$15,$30,$10,27,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$10,$15,$30,$10,28,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$10,$15,$30,$10,29,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$10,$15,$30,30,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$10,$15,$30,31,Multilateral Netting,Consider simplifying the bilateral netting with multilateral netting:,$15,$40,32,Multilateral Netting,Clearly, multilateral netting can simplify things greatly.,$15,$40,33,Multilateral Netting,Compare this:,$10,$35,$40,$30,$20,$25,$60,$40,$10,$30,$20,$30,34,Multilateral Netting,With this:,$15,$40,35,Transfer Pricing & Related Issues,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,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.,36,Transfer Pricing & Related Issues,For MNC, there exists the added complications of:,Differences in tax rates.,Import duties and quotas.,Exchange rate restrictions on the part of the host country.,37,Blocked Funds,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:,Transfer pricing,Unbundling services,Parallel and back-to-back loans,Swaps,38,Blocked Funds,Additional strategies for unblocking funds:,Export creation,Direct negotiation,Using the blocked funds to buy goods and services for the MNC.,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.,Transfer local expatriates from home payroll to the local subsidiaries payroll.,39,End Chapter Eighteen,40,
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