Chapter 17 Managing Multinational Cash Flows

Copyright Copyright 2005 by Thomson Learning, Inc. 2005 by Thomson Learning, Inc.

Chapter 17Chapter 17Managing Multinational Cash Managing Multinational Cash FlowsFlows

OrderOrder Order Order Sale Sale Payment Sent Cash Payment Sent Cash PlacedPlaced Received Received Received Received Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >

Time ==>Time ==> Accounts Disbursement Accounts Disbursement

< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Cash DisbursedInvoice Received Payment Sent Cash Disbursed

OrderOrder Order Order Sale Sale Payment Sent Cash Payment Sent Cash PlacedPlaced Received Received Received Received Accounts CollectionAccounts Collection < Inventory > < Receivable > < Float >< Inventory > < Receivable > < Float >

Time ==>Time ==> Accounts Disbursement Accounts Disbursement

< Payable > < Float >< Payable > < Float > Invoice Received Payment Sent Cash DisbursedInvoice Received Payment Sent Cash Disbursed


Learning ObjectivesLearning Objectives

Have an appreciation of the development of the Have an appreciation of the development of the current exchange rate system.current exchange rate system.

Understand the basic driving forces causing Understand the basic driving forces causing exchange rates to fluctuate.exchange rates to fluctuate.

Gain a basic understanding of the various Gain a basic understanding of the various means by which firms create internal means by which firms create internal structures to manage exchange rate structures to manage exchange rate fluctuations.fluctuations.

Have an appreciation for the differences Have an appreciation for the differences between the U.S. and foreign banking systems.between the U.S. and foreign banking systems.


Exchange RatesExchange Rates

Fixed versus floatingFixed versus floating

Spot ratesSpot rates

Forward ratesForward rates

Futures ratesFutures rates


Foreign Exchange QuotesForeign Exchange Quotes

Spot and forward rate quotesSpot and forward rate quotes US $ equivUS $ equivBritish (Pound) 1.8486British (Pound) 1.8486 30-Day Forward 1.8443 30-Day Forward 1.8443 90-Day Forward 1.8355 90-Day Forward 1.8355 180-Day Forward 1.8219 180-Day Forward 1.8219

Japan (Yen) .009401Japan (Yen) .009401 30-Day Forward .009411 30-Day Forward .009411 90-Day Forward .009428 90-Day Forward .009428 180-Day Forward .009455 180-Day Forward .009455 Switzerland (Franc) .8195Switzerland (Franc) .8195 30-Day Forward .8202 30-Day Forward .8202 60-Day Forward .8213 60-Day Forward .8213 180-Day Forward .8230 180-Day Forward .8230


Factors Affecting Exchange RatesFactors Affecting Exchange Rates

Relative level of interest rates in one country Relative level of interest rates in one country compared to anothercompared to another

Relative rate of inflation in one country Relative rate of inflation in one country compared to anothercompared to another

Government’s central bank reaction to Government’s central bank reaction to changes in exchange rates caused by economic changes in exchange rates caused by economic circumstancescircumstances

Economic and political factorsEconomic and political factors


Foreign Exchange ExposureForeign Exchange Exposure

Economic exposureEconomic exposure– the possibility that the long-term net present value of a the possibility that the long-term net present value of a

firm’s expected cash flows will change due to unexpected firm’s expected cash flows will change due to unexpected changes in exchange rateschanges in exchange rates

Transaction exposureTransaction exposure– the gains or losses associated with the settlement of the gains or losses associated with the settlement of

business transactions denominated in different currenciesbusiness transactions denominated in different currencies

Translation exposureTranslation exposure– results when the balance sheet and income statement of a results when the balance sheet and income statement of a

foreign subsidiary are translated into the parent foreign subsidiary are translated into the parent company’s domestic currency for consolidated financial company’s domestic currency for consolidated financial reporting purposesreporting purposes


Corporate Structure for Global Corporate Structure for Global Liquidity ManagementLiquidity Management

Centralize or not? The evidence is that financial Centralize or not? The evidence is that financial executives are…executives are…– building global liquidity pyramids that consolidate net building global liquidity pyramids that consolidate net

cash positions at the national level, then the broad cash positions at the national level, then the broad regional level, and finally at the enterprise level,regional level, and finally at the enterprise level,

– leveraging capacity of their ERP systems and treasury leveraging capacity of their ERP systems and treasury work stations to get timely cash balance reports system work stations to get timely cash balance reports system wide, andwide, and

– reducing number of banks in their system.reducing number of banks in their system.

Survey results: U.S.-based firms have centralized Survey results: U.S.-based firms have centralized their treasury structures with 30% fully their treasury structures with 30% fully centralized and 62% centrally coordinating centralized and 62% centrally coordinating treasury functions from HQ.treasury functions from HQ.


Managing Foreign Exchange Managing Foreign Exchange ExposureExposure

AvoidanceAvoidance Leading and LaggingLeading and Lagging NettingNetting Re-invoicingRe-invoicing HedgingHedging


A Typical Multilateral Netting A Typical Multilateral Netting SystemSystem

SubsidiarySubsidiary AA


SubsidiarySubsidiary BB

SubsidiarySubsidiary CC


Netting Netting AgentAgent

SubsidiarySubsidiary BB

SubsidiarySubsidiary CC

Payment Flows Without Netting Net Payment Flows With Netting Payment Flows Without Netting Net Payment Flows With Netting

Net amount owedNet amount owed

Net amountNet amount


Features of Non-US Banking Features of Non-US Banking SystemsSystems

Check clearingCheck clearing Interest on demand depositsInterest on demand deposits PoolingPooling Governmental policies and restrictionsGovernmental policies and restrictions Cash management servicesCash management services


SummarySummary

The chapter began with a brief history of exchange The chapter began with a brief history of exchange rate system.rate system.

Different forms of currency quotations were described Different forms of currency quotations were described including: spot, forward, and futures.including: spot, forward, and futures.

Three types of foreign exchange exposure were Three types of foreign exchange exposure were introduced including: economic, transaction, and introduced including: economic, transaction, and translation exposure.translation exposure.

The chapter discussed a variety of techniques for The chapter discussed a variety of techniques for managing foreign currency exposure.managing foreign currency exposure.

Complicating factors of managing international cash Complicating factors of managing international cash flows including: different regulations, value dating, flows including: different regulations, value dating, and fluctuating currency values.and fluctuating currency values.

Chapter 17 Managing Multinational Cash Flows

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Transcript of Chapter 17 Managing Multinational Cash Flows