1. Copyright  2005 by Thomson Learning, Inc. Chapter 17 Managing Multinational Cash Flows Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Received Payment Sent Cash Disbursed Invoice Received Payment Sent Cash Disbursed Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Received Payment Sent Cash Disbursed Invoice Received Payment Sent Cash Disbursed

2. Copyright  2005 by Thomson Learning, Inc. Learning Objectives v Have an appreciation of the development of the current exchange rate system. v Understand the basic driving forces causing exchange rates to fluctuate. v Gain a basic understanding of the various means by which firms create internal structures to manage exchange rate fluctuations. v Have an appreciation for the differences between the U.S. and foreign banking systems.

3. Copyright  2005 by Thomson Learning, Inc. Exchange Rates v Fixed versus floating v Spot rates v Forward rates v Futures rates

4. Copyright  2005 by Thomson Learning, Inc. Foreign Exchange Quotes v Spot and forward rate quotes US $ equiv British (Pound) 1.8486 30-Day Forward 1.8443 90-Day Forward 1.8355 180-Day Forward 1.8219 Japan (Yen).009401 30-Day Forward.009411 90-Day Forward.009428 180-Day Forward.009455 Switzerland (Franc).8195 30-Day Forward.8202 60-Day Forward.8213 180-Day Forward.8230

5. Copyright  2005 by Thomson Learning, Inc. Factors Affecting Exchange Rates v Relative level of interest rates in one country compared to another v Relative rate of inflation in one country compared to another v Government’s central bank reaction to changes in exchange rates caused by economic circumstances v Economic and political factors

6. Copyright  2005 by Thomson Learning, Inc. Foreign Exchange Exposure v Economic exposure –the possibility that the long-term net present value of a firm’s expected cash flows will change due to unexpected changes in exchange rates v Transaction exposure –the gains or losses associated with the settlement of business transactions denominated in different currencies v Translation exposure –results when the balance sheet and income statement of a foreign subsidiary are translated into the parent company’s domestic currency for consolidated financial reporting purposes

7. Copyright  2005 by Thomson Learning, Inc. Corporate Structure for Global Liquidity Management v Centralize or not? The evidence is that financial executives are… –building global liquidity pyramids that consolidate net cash positions at the national level, then the broad regional level, and finally at the enterprise level, –leveraging capacity of their ERP systems and treasury work stations to get timely cash balance reports system wide, and –reducing number of banks in their system. v Survey results: U.S.-based firms have centralized their treasury structures with 30% fully centralized and 62% centrally coordinating treasury functions from HQ.

8. Copyright  2005 by Thomson Learning, Inc. Managing Foreign Exchange Exposure v Avoidance v Leading and Lagging v Netting v Re-invoicing v Hedging

9. Copyright  2005 by Thomson Learning, Inc. A Typical Multilateral Netting System Subsidiary ASubsidiary A Subsidiary BSubsidiary C Subsidiary A Netting Netting Agent Agent Subsidiary BSubsidiary C Payment Flows Without Netting Net Payment Flows With Netting Payment Flows Without Netting Net Payment Flows With Netting Net amount owed Net amount

10. Copyright  2005 by Thomson Learning, Inc. Features of Non-US Banking Systems v Check clearing v Interest on demand deposits v Pooling v Governmental policies and restrictions v Cash management services

11. Copyright  2005 by Thomson Learning, Inc. Summary v The chapter began with a brief history of exchange rate system. v Different forms of currency quotations were described including: spot, forward, and futures. v Three types of foreign exchange exposure were introduced including: economic, transaction, and translation exposure. v The chapter discussed a variety of techniques for managing foreign currency exposure. v Complicating factors of managing international cash flows including: different regulations, value dating, and fluctuating currency values.