International Cash Management

1
Chapter 21

• International Cash Management

2
International Cash Management

• Important because
• Whats wrong with having too much cash?
• Whats the problem with having too little cash?
• Therefore, firm must strike a balance!

3
Strategies for Cash Flow Optimization

• Accelerating inflows
• Using netting
• Advantages
• Reduces number of transactions
• Reduces need for foreign exchange
• Forces more coordinated effort among subsidiaries

4
Cash Flow Optimization

• Minimizing taxation
• use transfer pricing
• encourage hi tax sub to use more debt financing
• Managing blocked funds
• Using leading lagging strategies

5
Issues That Make Cash Flow Optimization a
Challenge

• Government restrictions
• Inadequate communication
• Banking inefficiencies
• Lack of awareness
• Distortion of subsidiary performance

6
Effective Yield From Foreign Investing.

• Depends on
• interest rate
• exchange rate movements
• Assume US MNC wants to invest 500,000 in
  Indonesia _at_ 5 for 1 year (uncovered). Spot rate
  0.50 per Rupiah

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Effective Yield From Foreign Investing

• Convert dollars to Rupiah 500,000 /0.5
  1,000,000 Rupiah and invest _at_ 5 1,050,000
  Rupiah in 1 year
• Scenario 1 Spot rate in 1 year 0.55
• 1,050,000 0.55 577,000
• Effective yield (r) 77,000/500,000 15.5
• Alternatively
• r (1 if ) (1 ef ) 1
• (1.05) (1.10) 1
• 15.5

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Effective Yield From Foreign Investing

• Scenario 2 Rupiah falls to 0.45
• 1,050,000 (0.45) 472,500
• r (27,500)/500,000 -5.5
• Alternatively
• r (1.05) (1-0.10) 1 -5.5

d
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Implications of IRP for Foreign Investing

• Recall our earlier discussion of IRP and its
  implications for CIA.
• The same implications are relevant in this
  chapter!

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Summary

• Proper cash flow management is essential for
  maximizing shareholder wealth
• There are several complicating factors in an
  international environment
• You must consider both the interest rate and
  exchange rate when investing overseas
• IRP has important implications for foreign
  investing!