INTERNATIONAL

FINANCIAL

MANAGEMENT

EUN / RESNICKSecond Edition

18Chapter Eighteen

Multinational Cash

Management

Chapter Objective:

This chapter discusses various issues associated with

multinational cash management.

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reserved. 18-1

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 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.

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reserved. 18-4

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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reserved. 18-5

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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reserved. 18-6

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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reserved. 18-7

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

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reserved. 18-8

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

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reserved. 18-9

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

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-10

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

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-11

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$10 $35 $10$25

$60

$40

$10

$10

$20$30

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-12

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$10 $35 $10$25

$60

$40

$10

$10

$20$30

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-13

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$10 $35 $10$25

$60

$40

$10

$10

$10

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reserved. 18-14

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$10 $35 $10$25

$60

$40

$10

$10

$10

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reserved. 18-15

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$25 $10$25

$60

$40

$10

$10

$10

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reserved. 18-16

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$25 $10$25

$60

$40

$10

$10

$10

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reserved. 18-17

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$25 $10$25

$20$10

$10

$10

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reserved. 18-18

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$25 $10$25

$20$10

$10

$10

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reserved. 18-19

Multilateral Netting

Bilateral Netting would reduce the number of foreign

exchange transactions by half:

$25 $10$15 $20

$10

$10

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reserved. 18-20

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$25 $10$15 $20

$10

$10

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reserved. 18-21

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $20

$10

$10

$10

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reserved. 18-22

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $20

$10

$10

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reserved. 18-23

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $20

$10

$10

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reserved. 18-24

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $30

$10

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reserved. 18-25

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $30

$10

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-26

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15 $10$15 $30

$10

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-27

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$10

$15

$30

$10

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-28

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$10

$15

$30

$10

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-29

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$10

$15

$30

$10

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-30

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$10

$15

$30

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-31

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$10

$15

$30

McGraw-Hill/Irwin Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights

reserved. 18-32

Multilateral Netting

Consider simplifying the bilateral netting with multilateral

netting:

$15

$40

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reserved. 18-33

Multilateral Netting

Clearly, multilateral netting can simplify things greatly.

$15

$40

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reserved. 18-34

Multilateral Netting

Compare this:

$10 $35 $40$30

$20

$25 $60

$40

$10

$30

$20$30

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reserved. 18-35

Multilateral Netting

With this:

$15

$40

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reserved. 18-36

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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reserved. 18-37

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.

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reserved. 18-38

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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reserved. 18-39

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.

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reserved. 18-40

End Chapter Eighteen