1. Copyright  2002 by South-Western, a division of Thomson Learning TM Chapter 17 Managing Multinational Cash Flows Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Invoice Payment Cash Received Sent Paid Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Invoice Payment Cash Received Sent Paid

2. Copyright  2002 by South-Western, a division of Thomson Learning TM 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 US and foreign banking systems

3. Copyright  2002 by South-Western, a division of Thomson Learning TM Exchange Rates v Fixed versus floating v Spot rates v Forward rates v Futures rates

4. Copyright  2002 by South-Western, a division of Thomson Learning TM Foreign Exchange Quotes v Spot and forward rate quotes US $ equiv British (pound) 1.4731 30-Day Forward 1.4740 90-Day Forward 1.4752 180-Day Forward 1.4767 Japan (Yen).008920 30-Day Forward.008963 90-Day Forward.009050 180-Day Forward.009178 Switzerland (Franc).5920 30-Day Forward.5937 60-Day Forward.5967 180-Day Forward.6008

5. Copyright  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM Managing Foreign Exchange Exposure v Avoidance v Leading and Lagging v Netting v Re-invoicing v Hedging

8. Copyright  2002 by South-Western, a division of Thomson Learning TM 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

9. Copyright  2002 by South-Western, a division of Thomson Learning TM Features of Non-US Banking Systems v Check clearing v Interest on demand deposits v Governmental policies and restrictions v Cash management services

10. Copyright  2002 by South-Western, a division of Thomson Learning TM 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.