1. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. International Financial Management 10 th Edition by Jeff Madura 1

2. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 21 International Cash Management Chapter Objectives This chapter will: A. Explain working capital management from a subsidiary perspective versus a parent perspective B. Explain the various techniques used to optimize cash flows C. Explain the decision to invest cash internationally 2

3. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 Multinational Working Capital Management 1.Subsidiary Expenses 2.Subsidiary Revenue 3.Subsidiary Dividend Payment 4.Subsidiary Liquidity Management

4. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 Centralized Cash Management 1.Decentralized management is not optimal because it will force MNC to maintain larger cash investment than necessary. 2.Accommodating cash shortages by transferring cash from subsidiaries with excess funds to those that need funds. a.Technology used to facilitate fund transfers b.Monitoring of cash positions

5. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 Exhibit 21.1 Cash Flow of the Overall MNC 5

6. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 Techniques to Optimize Cash Flows 1.Accelerating Cash Inflows using lockboxes and preauthorized payments. 2.Minimizing currency conversion costs by netting, using a bilateral netting system or a multilateral netting system. 3.Managing blocked funds by incurring costs within the country or using transfer pricing. 4.Managing intersubsidiary cash transfers by using a leading or lagging strategy.

7. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 Complications in Optimizing Cash Flow 1.Company related characteristics 2.Government restrictions 3.Characteristics of the banking system

8. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 Investing Excess Cash 1.Determining the Effective Yield: a quicker method r = (1 + i f )(1 + e f ) – 1 where r = effective yield on foreign deposit, i f = quoted interest rate, e f = percentage change in value of currency

9. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 Investing Excess Cash 1.Implications of interest rate parity: Short term investing can be done on uncovered basis if IRP holds. 2.Use of forward rate as a forecast a.Forward rate serves as a break-even point to assess short term investment decision. b.Relationship with International Fisher Effect: if IRP holds and forward rate is an unbiased predictor of future spot rate, then we can expect IFE to hold.

10. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 Use of Exchange Rate Forecasts 1.Deriving the e f that equates foreign and domestic yields 2.Use of probability distributions.

11. © 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 Investing Excess Cash 1.Diversifying cash across currencies to limit the percentage of excess cash invested in each currency. 2.Dynamic hedging: strategy of applying a hedge when the currencies held are expected to depreciate and removing the hedge when the currencies held are expected to appreciate.