IBUS 302: International Finance

Slides:



Advertisements
Similar presentations
© McGraw Hill Companies, Inc., 2000 Financial Management in the International Business Chapter 20.
Advertisements

Cash Management Cash Cycle
Financial Management in the International Business
International Business 8e By Charles W.L. Hill. Chapter 20 Financial Management in the International Business Copyright © 2011 by the McGraw-Hill Companies,
Global money management, transfer pricing, other tax issues (D/R, p.552, pp , Head §12.1, (p. 183, pp ) Global financial management:
Welcome to class of International Financial Management by Dr. Satyendra Singh University of Winnipeg Canada.
1 Chapter 17 Financial Management. 2 Learning Objectives To understand how value is measured and managed across the multiple units of the multinational.
Foreign Exchange Exposure What is it and How it Affects the Multinational Firm?
Financial Management in International Business
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fourth Edition.
CASH MANAGEMENT The Collection & Disbursement of Public Funds Controlling Cash Collection & Disbursement Dual responsibility Receipts maintained in a location.
International Finance
Learning Objectives Discuss the internationalization of business.
Risk Management Strategy Joy McAlister November 4, 2003.
International Cash Management 21 Chapter South-Western/Thomson Learning © 2003.
Chapter 9 Foreign exchange markets Dr. Lakshmi Kalyanaraman 1.
Lecture 10: Understanding Foreign Exchange Exposure
Global Financial Services Outline –Why and how U.S. banks engage in international banking –Foreign banks in the U.S. –International lending –Foreign exchange.
Chapter Twenty Financial Management in the International Business.
The Multinational Corporation and Globalization
Financial Management and Accounting McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
19-1 Copyright © 2009 Pearson Education, Inc. publishing as Prentice Hall Part Six Managing International Operations Chapter Nineteen The Multinational.
CASH MANAGEMENT IN MNC NEHA ABHISHEK, BANGALORE Batch: 22, (5 th July to 30 th August, 2014)
1. Definitions Money is the blood of business MNC face numerous difficulties when they need to move and position funds among their subsidiaries MNC are.
Module The relationship between savings and investment spending 2. The purpose of the 5 principal types of financial assets: stocks, bonds, loans,
Working Capital Management for the Multinational Corporation
Slides prepared by April Knill, Ph.D., Florida State University Chapter 19 Managing Net Working Capital.
Dr. A. DeMaskey Managing the Multinational Financial System International Financial Management.
Management in a Multinational
19 Multinational Cash Management Chapter Objective:
Dr. A. DeMaskey Managing the Multinational Financial System International Finance.
Copyright © 2007 by The McGraw-Hill Companies, Inc. All rights reserved INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fourth Edition Chapter Objective:
International Cash Management 21 Chapter South-Western/Thomson Learning © 2006 Slides by Yee-Tien (Ted) Fu.
1 OUTLINE FOR CHAPTER 19 Understand Repositioning of Funds –Constraints on Moving of Funds –Ways to Transfer Funds –Unbundling –What to do if Funds are.
INTERNATIONAL FINANCE Lecture 4. Overview Common methods to conduct international business. International trade Licensing, Franchising, Joint ventures,
Multinational Cost of Capital & Capital Structure 17 Chapter South-Western/Thomson Learning © 2003.
International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
International Cash Management 28 Lecture Chapter Objectives To explain the difference in analyzing cash flows from a subsidiary perspective versus.
MNEs need access to capital Finance and Treasury Functions in the Internalization Process Chief Financial Officer (CFO)—vice president of finance Multinational.
International Business 9e By Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Financial Management and Accounting McGraw-Hill/Irwin International Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.
Multinational Cost of Capital & Capital Structure.
Short Term Financial Management in a Multinational Corporation
©2009 McGraw-Hill Ryerson Limited 1 of International Financial Management Prepared by: Michel Paquet SAIT Polytechnic ©2009 McGraw-Hill Ryerson Limited.
International Business 7e by Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Lecture 28. Lecture Review Financial Management in the International Business 1. investment decisions – decisions about what to finance 2. financing decisions.
Lecture 27. Lecture Review Financial Management in the International Business 1. investment decisions – decisions about what to finance 2. financing decisions.
International Cash Management 21 Chapter South-Western/Thomson Learning © 2003.
The Foreign Exchange Market
P4 Advanced Investment Appraisal. 2 Section F: Treasury and Advanced Risk Management Techniques F2. The use of financial derivatives to hedge against.
Market for, and management of, foreign exchange Day 2 Dr Michael Dowling.
INTERNATIONAL FINANCIAL MANAGEMENT EUN / RESNICK Fifth Edition Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin.
宁波工程学院国商教研室蒋力编 Topic 2 Financial Management of the Multinational Firm.
International Tax Environment
Multinational Cash Management
International Accounting
International Business 9e
FOREIGN EXCHANGE RISK MANAGEMENT
Multinational Cost of Capital & Capital Structure
Advanced Accounting, Third Edition
OUTLINE FOR CHAPTER “19” Read pages and
International finance management
International Flow of Funds
FIN 440: International Finance
CHAPTER 5 Currency Derivatives © 2000 South-Western College Publishing
International Cash Management
Advanced Accounting, Third Edition
12 Multinational Capital Structure & Long Term Financing
Presentation transcript:

IBUS 302: International Finance Topic 21-Cash Management Lawrence Schrenk, Instructor

Learning Objectives Explain the importance of international cash balances.▪ Describe exposure netting and other cash management techniques. Describe transfer pricing, arms length price, and blocked funds.▪

The Management of International Cash Balances Decision Variables: Size of Cash Balances Currency of Cash Balances Location of Cash Balances

Size of Cash Balances The Liquidity Trade-Off The cost of keeping “too much” cash on hand, i.e. the opportunity costs of holding cash (lower return). The cost of not keeping enough cash on hand, i.e. the trading costs associated with having too little cash (transaction costs, short-term debt costs, etc.) The variability of cash flows.

Size of Cash Balances Trading costs increase when the firm must sell securities to meet cash needs. Trading costs Total cost of holding cash Costs in dollars of holding cash Opportunity Costs The investment income foregone when holding cash. C* ▪ Size of cash balance ▪

Currency of Cash Balances By maintaining cash balances in a particular currency, the MNC is essentially speculating in that currency. Strategies: Pooling Netting

Location of Cash Balances 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?

New Challenges Cash Flow Complexity Political Risk Legal and Ethical Issues Tax Issues Foreign Exchange (FX) Exposure

Cash Management Techniques Pooling Netting Multicurrency Accounts Hedging

Pooling Company and all its subsidiaries must maintain accounts at the same bank Notional pooling: Positive and negative balances are aggregated each day to calculate interest earned or due; funds are not actually transferred but merely totaled Some type of credit facilities are usually required to support negative balances in the pool Most pooling is currently single-currency/one country

Exposure Netting Bilateral Netting Multilateral Netting Purchases between two subsidiaries are periodically netted against each other. Payments netted in different currencies are converted to a common reference currency. Multilateral Netting Purchases between multiple subsidiaries are periodically netted against each other. Payments are combined ina common, reference currency. .

Exposure Netting MNC has the following foreign exchange transactions: $20 $30 $40 $10 $10 $35 $30 $40 $25 $60 $20 $30 Transactions: 12 Value: $350

Exposure Netting MNC has the following foreign exchange transactions: Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 20 10 40 25 Total Dis.

Exposure Netting Disbursements: Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 20 10 40 25 Total Dis. 70 85 65 130 350

Exposure Netting Receipts: Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 125 20 10 40 70 25 65 90 Total Dis. 85 130 350

– = Exposure Netting Net Cash Flows: ▪ Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 125 55▪ 20 10 40 70 25 65 90 Total Dis. 85 130 350 – =

Exposure Netting Net Cash Flows : ▪ Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 125 55 20 10 40 70 (15) 25 65 90 (40) Total Dis. 85 130 350

Exposure Netting Complete Table : Disbursements Receipts US Canada Germany UK Total R. Net — 30 35 60 125 55 20 10 40 70 (15) 25 65 90 (40) Total Dis. 85 130 350

Exposure Netting 1. Total disbursements must equal total receipts. NOTES 1. Total disbursements must equal total receipts. 70 + 85 + 65 + 130 = 125 + 70 + 65 + 90 = 350 2. Total net must equal zero. 55 – 15 – 40 = 0

Bilateral Netting Bilateral Netting reduces transactions by half: $20 $30 $10 $20 $30 $40 $40 $10 $35 $15 $40 $30 $25 $20 $10 $10 $10 $10 $35 $30 $40 $25 $25 $60 $60 $30 $20 $20 $10 $30 Transactions: 6 Value: $90

Bilateral Netting Transactions: Disbursements Receipts US Canada Germany UK Total R. Net — 10 25 20 15 Total Dis.

Bilateral Netting Disbursements: Disbursements Receipts US Canada Germany UK Total R. Net — 10 25 20 15 Total Dis. 40 90

Bilateral Netting Receipts: Disbursements Receipts US Canada Germany UK Total R. Net — 10 25 20 55 15 Total Dis. 40 90

Bilateral Netting Net Cash Flows: Disbursements Receipts US Canada Germany UK Total R. Net — 10 25 20 55 (15) 15 (40) Total Dis. 40 90

Exposure Netting 1. Total disbursements must equal total receipts. NOTES 1. Total disbursements must equal total receipts. 25 + 25 + 40 = 55 + 10 + 25 = 90 2. Total net must equal zero. 55 – 15 – 40 = 0

Key Idea Expose netting never changes… Net Cash Flows Expose netting does change disbursements and receipts. Expose netting decreases transactions and total value of cash flows.

Multilateral Netting Two Suggestions: Use the one set of values you know… Net cash flows to each unit. Start the calculations with the subsidiaries and end with the parent.

Multilateral Netting Net Cash Flows: Disbursements Receipts US Canada Germany UK Total R. Net — 55 (15) (40) Total Dis.

Multilateral Netting Canada pays its net cash flow to parent: Disbursements Receipts US Canada Germany UK Total R. Net — 15 55 (15) (40) Total Dis.

Multilateral Netting England pays its net cash flow to parent: Disbursements Receipts US Canada Germany UK Total R. Net — 15 40 55 (15) (40) Total Dis.

Multilateral Netting Germany pays its net cash flow to parent: Disbursements Receipts US Canada Germany UK Total R. Net — 15 40 55 (15) (40) Total Dis.

Multilateral Netting All other transactions are zero: Disbursements Receipts US Canada Germany UK Total R. Net — 15 40 55 (15) (40) Total Dis.

Multilateral Netting Disbursements: Disbursements Receipts US Canada Germany UK Total R. Net — 15 40 55 (15) (40) Total Dis.

Multilateral Netting Receipts: Disbursements Receipts US Canada Germany UK Total R. Net — 15 40 55 (15) (40) Total Dis.

Multilateral Netting Multilateral netting is even more effective: $40 $10 $40 $15 $15 $15 $10 $10 $30 $40 $20 $15 $25 $10 $10 $10 Transactions: 2 Value: $55

Multilateral Netting with Central Depository Some firms use a central depository as a cash pool to facilitate funds mobilization and reduce the chance of misallocated funds. $15 $55 Central depository $40

Multilateral Netting with Central Depository Consider the net cash flows of the affiliates with the rest of the world: Affiliate Net Receipts from Multilateral Netting Net Excess Cash from Transactions with Third Parties Net Flow U.S. $55,000 $20,000 $35,000 Canada ($15,000) ($30,000) $15,000 Germany $75,000 ($75,000) U.K. ($40,000) ($25,000) Total

Multilateral Netting with Central Depository Net cash flows after multilateral netting and net payments from external transactions $35 $15 Central depository $15 $75

Netting and FX The examples have used dollars. Where do other currencies fit in?

Transfer Pricing 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 even 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.

International Transfer Pricing Added complications : Differences in tax rates Exchange rate restrictions on the part of the host country. Most countries have regulations controlling transfer pricing. In the U.S., the tax code requires transfer prices to be arms length prices.

Arms Length Price A price that a willing seller would charge a willing unrelated buyer. The IRS prescribes three methods for estimating an arms length price Comparable uncontrolled price. Resale price: the price at which the good is resold by the affiliate is reduced by overhead and profit. Cost-plus approach: an appropriate profit is added to the cost of the manufacturing affiliate.

Blocked Funds Restrictions on the movement of funds in a specific currency. A form of political risk is the risk that the foreign government may impose exchange restrictions on its own currency.

Blocked Funds Strategies Additional strategies for unblocking funds: Direct negotiation Export creation Using the blocked funds to buy goods and services for the MNC. Transfer local expatriates from home payroll to the local subsidiaries payroll. Transfer pricing Swaps