C H A P T E R 21C H A P T E R 21

International Cash International Cash ManagementManagement

Chapter OverviewChapter Overview

A. Cash Flow Analysis: Subsidiary A. Cash Flow Analysis: Subsidiary PerspectivePerspective

B. Centralized Cash ManagementB. Centralized Cash Management

C. Techniques to Optimize Cash FlowsC. Techniques to Optimize Cash Flows

D. Complications in Optimizing Cash D. Complications in Optimizing Cash FlowsFlows

E. Investing Excess CashE. Investing Excess Cash

Chapter 21 ObjectivesChapter 21 Objectives

This chapter will:This chapter will:A. Explain the difference in analyzing cash A. Explain the difference in analyzing cash

flows from a subsidiary perspective and flows from a subsidiary perspective and from a parent perspectivefrom a parent perspective

B. Explain the various techniques used to B. Explain the various techniques used to optimize cash flowsoptimize cash flows

C. Explain common complications in C. Explain common complications in optimizing cash flowsoptimizing cash flows

D. Explain the potential benefits and risks D. Explain the potential benefits and risks from foreign investingfrom foreign investing

A. Cash Flow Analysis: Subsidiary A. Cash Flow Analysis: Subsidiary Perspective Perspective

1. Subsidiary Expenses1. Subsidiary Expenses

2. Subsidiary Revenue2. Subsidiary Revenue

3. Subsidiary Dividend Payments3. Subsidiary Dividend Payments

4. Subsidiary Liquidity Management 4. Subsidiary Liquidity Management

B. Centralized Cash ManagementB. Centralized Cash Management

1.1. MNCs commonly use MNCs commonly use centralized cash centralized cash management management to monitor and manage the to monitor and manage the parent-subsidiary and intersubsidiary cash parent-subsidiary and intersubsidiary cash flows. flows.

2.2. This role is critical since it can often benefit This role is critical since it can often benefit individual subsidiaries in need of funds or individual subsidiaries in need of funds or overly exposed to exchange rate risk. overly exposed to exchange rate risk.

21.121.1

Cash Flow of the Overall MNC

C. Techniques to Optimize Cash C. Techniques to Optimize Cash FlowsFlows

1. Accelerating Cash Inflows1. Accelerating Cash Inflows

2. Minimizing Currency Conversion Costs2. Minimizing Currency Conversion Costs

3. Managing Blocked Funds3. Managing Blocked Funds

4. Managing Intersubsidiary Cash Transfers4. Managing Intersubsidiary Cash Transfers

D. Complications in Optimizing D. Complications in Optimizing Cash FlowsCash Flows

1. Company-Related Characteristics1. Company-Related Characteristics

2. Government Restrictions2. Government Restrictions

3. Characteristics of Banking Systems3. Characteristics of Banking Systems

E. Investing Excess CashE. Investing Excess Cash

1. How to Invest Excess Cash 1. How to Invest Excess Cash

21.421.4

Short-Term Annualized Interest Rates Among Countries(as of February 2004)

E. Investing Excess CashE. Investing Excess Cash

2. Centralized Cash Management2. Centralized Cash Management

a. Centralization When a. Centralization When Subsidiaries Subsidiaries Use the Same Use the Same CurrencyCurrency

b. Centralized Cash Management b. Centralized Cash Management of of Multiple CurrenciesMultiple Currencies

c. Impact of Technology on c. Impact of Technology on Centralized Cash ManagementCentralized Cash Management

E. Investing Excess CashE. Investing Excess Cash

3. Determining the Effective Yield3. Determining the Effective Yield

4. Implications of Interest Rate Parity 4. Implications of Interest Rate Parity

E. Investing Excess CashE. Investing Excess Cash

5. Use of the Forward Rate as a 5. Use of the Forward Rate as a ForecastForecast

a. Relationship with the a. Relationship with the International Fisher EffectInternational Fisher Effect

b. Conclusion about the Forward b. Conclusion about the Forward RateRate

E. Investing Excess CashE. Investing Excess Cash

6. Use of Exchange Rate Forecasts6. Use of Exchange Rate Forecasts

a. Use of Probability Distributionsa. Use of Probability Distributions

7. Diversifying Cash across Currencies7. Diversifying Cash across Currencies

8. Dynamic Hedging8. Dynamic Hedging