This chapter emphasizes the decisions involved in the manage¬ment of cash by an MNC. The additional opportunities and risks of cash management for an MNC versus a domestic firm should be stressed. There are actually three key components of the chapter. The first is distinguishing between subsidiary control over excess cash versus centralized control. | International Cash Management 28 Lecture Chapter Objectives To explain the difference in analyzing cash flows from a subsidiary perspective versus a parent perspective; To explain the various techniques used to optimize cash flows; To explain common complications in optimizing cash flows; and To explain the potential benefits and risks of foreign investments. 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. 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. Complications in Optimizing Cash Flows Investing Excess Cash Excess funds can be invested in domestic or | International Cash Management 28 Lecture Chapter Objectives To explain the difference in analyzing cash flows from a subsidiary perspective versus a parent perspective; To explain the various techniques used to optimize cash flows; To explain common complications in optimizing cash flows; and To explain the potential benefits and risks of foreign investments. 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. 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. Complications in Optimizing Cash Flows Investing Excess Cash Excess funds can be invested in domestic or foreign short-term securities, such as Eurocurrency deposits, Treasury bills, and commercial papers. Sometimes, foreign short-term securities have higher interest rates. However, firms must also account for the possible exchange rate movements. Short-Term Interest Rates as of February 2004 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. Funds can also be invested in securities that are denominated in the currencies needed in the future. Investing Excess Cash Given the current online technology, MNCs should be able to efficiently create a multinational communications network among their subsidiaries to ensure that information about their cash positions is continually updated. Investing Excess Cash Centralized Cash Management Determining the Effective Yield The effective yield on foreign investments r = (1 + if )(1 + ef ) –
