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
The Management of Multinational Cash Balances
Cash Management Systems in Practice
Transfer Pricing & Related Issues
Blocked Funds
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The Management of
International Cash Balances
The size of cash balances
The currency denomination
Where these cash balances are located
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The Size of Cash Balances
The optimal size of the firm’s cash balances
depend upon:
The
cost of keeping “too much” cash on hand.
i.e.
The
cost of not keeping enough cash on hand.
i.e.
The
the opportunity costs of holding cash
the trading costs associated with having too little cash
variability of cash flows.
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Choice of Currency
By maintaining cash balances in a particular
currency, the MNC is essentially speculating (or
hedging?) in that currency.
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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?
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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.
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Multilateral Netting
Consider a U.S. MNC with three subsidiaries and the
following foreign exchange transactions:
$20
$30
$40
$10
$10 $35
$30 $40
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$20
$30
$40
$10
$10 $35
$30 $40
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$30 $40
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$30 $40
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$10
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$10
$25
$20
$30
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$10
$25
$60
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$10 $35
$10
$25
$60
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$25
$10
$25
$60
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$40
$10
$25
$10
$25
$60
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$20
$25
$10
$10
$25
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$20
$25
$10
$10
$25
$10
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Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10
$20
$25
$15
$10
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$20
$25
$15
$10
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$20
$15 $10
$15
$10
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$20
$15
$15
$10
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$20
$15
$15
$10
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$30
$15
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$15
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$30
$15
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$15
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$30
$15
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$15
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15
$30
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15
$30
$10
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Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15
$40
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Multilateral Netting
Clearly, multilateral netting can simplify things greatly.
$15
$40
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Multilateral Netting
Compare this:
$20
$30
$40
$10
$10 $35
$30 $40
$25
$20
$30
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$60
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Multilateral Netting
With this:
$15
$40
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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.
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Transfer Pricing & Related Issues
For MNC, there exists the added complications of:
Differences
Import
in tax rates.
duties and quotas.
Exchange
rate restrictions on the part of the
host country.
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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
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Blocked Funds
Additional strategies for unblocking funds:
Direct
negotiation
Export
creation
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.
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End Chapter Eighteen
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