IFM_IM_ch21 - Chapter 21 International Cash Management...

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Chapter 21 International Cash Management Lecture Outline Multinational Management of Working Capital Subsidiary Expenses Subsidiary Revenue Subsidiary Dividend Payments Subsidiary Liquidity Management Centralized Cash Management Techniques to Optimize Cash Flows Accelerating Cash Inflows Minimizing Currency Conversion Costs Managing Blocked Funds Managing Intersubsidiary Cash Transfers Complications in Optimizing Cash Flow Company-Related Characteristics Government Restrictions Characteristics of Banking Systems Investing Excess Cash How to Invest Excess Cash Centralized Cash Management Determining the Effective Yield Implications of Interest Rate Parity Use of the Forward Rate as a Forecast Use of Exchange Rate Forecasts Diversifying Cash across Currencies Dynamic Hedging 96
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Chapter 21: International Cash Management 97 Chapter Theme This chapter emphasizes the decisions involved in the management of cash by an MNC. The additional opportunities and risks of cash management for an MNC versus a domestic firm should be stressed. There are actually three key components of the chapter. The first is distinguishing between subsidiary control over excess cash versus centralized control. An argument is made in favor of centralized control. The second component is optimizing cash flow. Several techniques are recommended to optimize cash flow. Finally, the decision of where to invest excess cash should be discussed with consideration of all factors that need to be incorporated for this decision. Topics to Stimulate Class Discussion 1. Should international cash management be conducted at the subsidiary level or at the centralized level? Elaborate. 2. What is the use of netting to an MNC? 3. How can a firm deal with blocked funds? 4. Assume that as a treasurer of a U.S. corporation, you believe that the British pound’s forward rate is an accurate forecast of the pound’s future spot rate. What does this imply about your decision of whether to invest cash in the U.S. or in the U.K.? POINT/COUNTER-POINT: Should Interest Rate Parity Prevent MNCs From Investing in Foreign Currencies? POINT: Yes. Currencies with high interest rates have large forward discounts according to interest rate parity. To the extent that the forward rate is a reasonable forecast of the future spot rate, investing in a foreign country is not feasible. COUNTER-POINT: No. Even if interest rate parity holds, MNCs should still consider investing in a foreign currency. The key is their expectations of the future spot rate. If their expectations of the future spot rate are higher than the forward rate, the MNC would benefit from investing in a foreign currency. WHO IS CORRECT? Use the Internet to learn more about this issue. Which argument do you support? Offer your own opinion on this issue. ANSWER: The key is whether the MNC can more accurately predict the future spot rate better than
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This note was uploaded on 12/30/2010 for the course MBA FI565 taught by Professor Benard during the Spring '10 term at Keller Graduate School of Management.

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IFM_IM_ch21 - Chapter 21 International Cash Management...

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