INTERNATIONAL
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
18Chapter EighteenMultinational Cash Management
Chapter Objective:
This chapter discusses various issues associated with
multinational cash management.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-1
Chapter Outline
? The Management of Multinational Cash Balances
? Cash Management Systems in Practice
? Transfer Pricing & Related Issues
? Blocked Funds
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-2
The Management of
International Cash Balances
? The size of cash balances
? The currency denomination
? Where these cash balances are located
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-3
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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-4
Choice of Currency
? By maintaining cash balances in a particular
currency,the MNC is essentially speculating (or
hedging?) in that currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-5
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?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-6
Cash Management Systems in Practice
? 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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-7
Multilateral Netting
Consider a U.S,MNC with three subsidiaries and the
following foreign exchange transactions:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-8
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-9
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-10
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-11
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-12
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-13
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-14
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-15
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-16
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-17
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$20 $10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-18
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$20 $10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-19
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-20
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$25 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-21
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-22
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-23
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-24
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-25
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-26
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-27
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-28
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-29
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-30
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-31
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-32
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-33
Multilateral Netting
Clearly,multilateral netting can simplify things greatly,
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-34
Multilateral Netting
Compare this:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-35
Multilateral Netting
With this:
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-36
Transfer Pricing & Related Issues
? 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 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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-37
Transfer Pricing & Related Issues
? For MNC,there exists the added complications of,
?Differences in tax rates.
?Import duties and quotas.
?Exchange rate restrictions on the part of the
host country.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-38
Blocked Funds
? A form of political risk is the risk that the foreign
government may impose exchange restrictions on
its own currency.
? Several methods exist for moving blocked funds:
?Transfer pricing
?Unbundling services
?Parallel and back-to-back loans
?Swaps
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-39
Blocked Funds
? Additional strategies for unblocking funds:
?Export creation
?Direct negotiation
?Using the blocked funds to buy goods and services for the
MNC.
?For example,use the National Airlines of the host country for
travel of executives of the MNC,and pay for the tickets with the
blocked funds.
?Transfer local expatriates from home payroll to the local
subsidiaries payroll.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-40
End Chapter Eighteen
FINANCIAL
MANAGEMENT
EUN / RESNICK
Second Edition
18Chapter EighteenMultinational Cash Management
Chapter Objective:
This chapter discusses various issues associated with
multinational cash management.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-1
Chapter Outline
? The Management of Multinational Cash Balances
? Cash Management Systems in Practice
? Transfer Pricing & Related Issues
? Blocked Funds
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-2
The Management of
International Cash Balances
? The size of cash balances
? The currency denomination
? Where these cash balances are located
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-3
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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-4
Choice of Currency
? By maintaining cash balances in a particular
currency,the MNC is essentially speculating (or
hedging?) in that currency.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-5
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?
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-6
Cash Management Systems in Practice
? 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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-7
Multilateral Netting
Consider a U.S,MNC with three subsidiaries and the
following foreign exchange transactions:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-8
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-9
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-10
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $40$30
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-11
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-12
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-13
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-14
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$10 $35 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-15
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-16
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$60
$40
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-17
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$20 $10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-18
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10
$25
$20 $10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-19
Multilateral Netting
Bilateral Netting would reduce the number of foreign
exchange transactions by half:
$25 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-20
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$25 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-21
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-22
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-23
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$20
$10
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-24
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-25
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-26
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15 $10$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-27
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-28
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-29
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
$10
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-30
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-31
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$10
$15
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-32
Multilateral Netting
Consider simplifying the bilateral netting with multilateral
netting:
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-33
Multilateral Netting
Clearly,multilateral netting can simplify things greatly,
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-34
Multilateral Netting
Compare this:
$10 $35 $40$30
$20
$25
$60
$40
$10
$30
$20
$30
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-35
Multilateral Netting
With this:
$15
$40
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-36
Transfer Pricing & Related Issues
? 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 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.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-37
Transfer Pricing & Related Issues
? For MNC,there exists the added complications of,
?Differences in tax rates.
?Import duties and quotas.
?Exchange rate restrictions on the part of the
host country.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-38
Blocked Funds
? A form of political risk is the risk that the foreign
government may impose exchange restrictions on
its own currency.
? Several methods exist for moving blocked funds:
?Transfer pricing
?Unbundling services
?Parallel and back-to-back loans
?Swaps
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-39
Blocked Funds
? Additional strategies for unblocking funds:
?Export creation
?Direct negotiation
?Using the blocked funds to buy goods and services for the
MNC.
?For example,use the National Airlines of the host country for
travel of executives of the MNC,and pay for the tickets with the
blocked funds.
?Transfer local expatriates from home payroll to the local
subsidiaries payroll.
McGraw-Hill/Irwin Copyright ? 2001 by The McGraw-Hill Companies,Inc,All rights
reserved,
18-40
End Chapter Eighteen
