The document discusses international cash management for multinational corporations. It covers techniques for optimizing cash flows, complications that can arise, and strategies for investing excess cash. Centralized cash management is recommended to efficiently manage parent-subsidiary and intercompany cash movements and investments across multiple currencies. The success of cash management strategies depends on accurately forecasting exchange rates and interest rates.
The document discusses international cash management for multinational corporations. It covers techniques for optimizing cash flows, complications that can arise, and strategies for investing excess cash. Centralized cash management is recommended to efficiently manage parent-subsidiary and intercompany cash movements and investments across multiple currencies. The success of cash management strategies depends on accurately forecasting exchange rates and interest rates.
The document discusses international cash management for multinational corporations. It covers techniques for optimizing cash flows, complications that can arise, and strategies for investing excess cash. Centralized cash management is recommended to efficiently manage parent-subsidiary and intercompany cash movements and investments across multiple currencies. The success of cash management strategies depends on accurately forecasting exchange rates and interest rates.
• While each 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. • International cash management can be segmented into two functions: • optimizing cash flow movements, and • investing excess cash. Centralized Cash Management • The centralized cash management 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 considering • any potential adverse impact on cash flows, and • how to avoid such adverse impacts. Techniques to Optimize Cash Flows Accelerating Cash Inflows • The 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 customer’s bank account). Techniques to Optimize Cash Flows Minimizing Currency Conversion Costs • Netting 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 multilateral netting system usually involves more complex interchanges. Techniques to Optimize Cash Flows Managing Blocked Funds • A government may require that funds remain within 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. Techniques to Optimize Cash Flows Managing Intersubsidiary Cash Transfers • A 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 technique is called lagging. Complications in Optimizing Cash Flows Company-Related Characteristics • When a subsidiary delays its payments to the other subsidiaries, the other subsidiaries may be forced to borrow until the payments arrive. Government Restrictions • Some governments may prohibit the use of a netting system, or periodically prevent cash from leaving the country. Complications in Optimizing Cash Flows Characteristics of Banking Systems • The abilities of banks to facilitate cash transfers for MNCs may vary among countries. • The banking systems in different countries usually differ too. Investing Excess Cash • Excess funds can be invested in domestic 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. Investing Excess Cash Centralized Cash Management • Centralized 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 investment securities may also be denominated in the currencies that will be needed in the future. Investing Excess Cash Determining the Effective Yield • The effective rate for foreign investments rf = ( 1 + if ) ( 1 + ef ) – 1 where if = the quoted interest rate on the investment ef = the % D in the spot rate • If the foreign currency depreciates over the investment period, the effective yield will be less than the quoted rate. Investing 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 investor’s home interest rate. • However, short-term foreign investing on an uncovered basis may still result in a higher effective yield. Investing Excess Cash Use of the Forward Rate as a Forecast • If 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 rate at maturity is more than the forward rate at the time the investment is undertaken, and vice versa. Investing Excess Cash Use of Exchange Rate Forecasts • Given an exchange rate 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. Investing Excess Cash Diversifying Cash Across Currencies • If 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 correlations among the currencies. Investing Excess Cash Use of Dynamic Hedging to Manage Cash • Dynamic 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 firm’s ability to accurately forecast the direction of exchange rate movements. Topic Review • Techniques to Optimize Cash Flows • Accelerating Cash Inflows • Minimizing Currency Conversion Costs • Managing Blocked Funds • Managing Intersubsidiary Cash Transfers • Complications in Optimizing Cash Flows • Company-Related Characteristics • Government Restrictions • Characteristics of Banking Systems Topic Review • Investing Excess Cash • How to Invest Excess Cash • Centralized Cash Management • Determining the Effective Yield • Implications of Interest Rate Parity • Use of the Forward Rate as a Forecast • Use of Exchange Rate Forecasts • Diversifying Cash Across Currencies • Use of Dynamic Hedging to Manage Cash Topic Review • Impact of International Cash Management on an MNC’s Value
(New Thinking in Political Economy Series) Richard M. Salsman - The Political Economy of Public Debt - Three Centuries of Theory and Evidence-Edward Elgar Pub (2017) PDF