0. INTERNATIONAL FINANCIAL MANAGEMENT Fifth Edition EUN / RESNICK
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

1. 19 Multinational Cash Management Chapter Objective:
This chapter discusses various issues associated with multinational cash management. 19
Chapter Nineteen
Multinational Cash Management
Fifth Edition
19-1

2. Chapter Outline The Management of Multinational Cash Balances
Bilateral Netting of Internal and external Net Cash Flows
Reduction in Precautionary Cash Flows
Cash Management Systems in Practice
19-2

3. The Management of International Cash Balances
The size of cash balances
The currency denomination
Where these cash balances are located
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4. 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.
19-4

5. The 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
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6. 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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7. 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?
19-7

8. Netting: Bilateral and Multilateral
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.
19-8

9. Exposure Netting: an Example
Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions ($000s):
$20
$30
$40
$10
$10
$35
$30
$40
$25
$60
$20
$30
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10. Exposure Netting: an Example
Bilateral Netting would reduce the number of foreign exchange 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
19-10

11. Multilateral Netting: an Example
Consider simplifying the bilateral netting with multilateral netting:
$40
$10
$10
$40
$15
$15
$15
$10
$10
$30
$40
$20
$15
$25
$10
$10
$10
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12. 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
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13. 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
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14. Netting with Central Depository
Net cash flows after multilateral netting and net payments from external transactions
$35
$15
Central depository
$75
$15
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15. Reduction in Precautionary Cash Balances
An additional benefit of a centralized cash depository is that the MNC’s investment in precautionary cash balances can be substantially reduced without a reduction in its ability to cover unforeseen expenses.
In the above examples, suppose that each affiliate had to have the cash on hand to make disbursements before it received what it was owed—that would result in a big cash drain on the firm.
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16. Cash Management Systems in Practice
The most frequently cited benefits of a multilateral netting system are:
1. The decrease in the expense associated with funds transfer, which in some cases can be over $1,000 for a large international transfer of foreign exchange.
2. The reduction in the number of foreign exchange transactions and the associated cost of making fewer but larger transactions.
3. The reduction in intracompany float, which is frequently as high as five days even for wire transfers.
4. The savings in administrative time.
5. The benefits that accrue from the establishment of a formal information system, which serves as the foundation for centrally managing transaction exposure and the investment of excess funds.
19-16

17. Exposure Netting Sample Problem
In the following slides, a firm faces the following exchange rates:
£1.00 =
$2.00
€1.00
$1.50
SFr 1.00
$0.90
Beginning with the next slide, try to use multilateral netting to reduce the number of transactions as much as possible.
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18. Exposure Netting SFr150 $150 €150 €150 £150 £150 $150 SFr150 $150
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19. Exposure Netting £150× £1 $2.00 = $300 SFr150× SFr1 $0.90 = $135 €150×
$1.50
= $225
Exposure Netting
$225
$300
$150
$135
$135
SFr150
$150
$225
€150
$300
€150
£150
$225
$300
£150
$150
SFr150
$150
$135
SFr150
$135
$225
€150
£150
$300
19-19

20. Exposure Netting $75 $165 $90 $150 $15 $135 $15 $150 $225 $90 $225
$300
$75
$165
$300
$150
$135
$150
$135
$225
$75
$300
19-20

21. Exposure Netting $180 $90 $210 $15 $15 $180 $165 $150 $210 $90 $75
$150 + $75 = $225
$225 = $210 + $15
$180 = $165 + $15
$75
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22. End Chapter Nineteen
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