INTERNATIONAL

CASH
MANAGEMENT
International Financial Management
by Jeff Madura
 Hello!

Salma Meidiana C1H017018

Tasya S Febriany C1H017030
Dhiya Azzahra N P
C1H017031
 What is cash
management?
Cash Management is the
optimization of cash flows
and the investment of excess cash.
 Subsidiary Expenses
Multinational The subsidiary will normally have a more difficult time forecasting
Working Capital future outflow payments if its purchases are international rather
Management than domestic because of exchange rate fluctuations.

Subsidiary Revenue
Subsidiaries’ sales volume may be more volatile than if the goods
were only sold domestically. Accounts receivable management is
an important part of the subsidiary’s working capital management
because of its potential impact on cash inflows.
Multinational Subsidiary Dividend Payment
When dividend payments and fees are known in advance and
Working Capital denominated in the subsidiary's currency, forecasting cash flows
Management is easier.

Subsidiary Liquidity Management

After accounting for all outflow and inflow payments, the
subsidiary may have excess or deficient cash. It uses liquidity
management to invest excess cash or borrow to cover cash
deficiencies.
 “
Centralized Cash Management
Decentralized management is not optimal because it will force MNC to
maintain larger cash investment than necessary.

MNCs commonly use centralized cash management to monitor and

manage the parent-subsidiary and intersubsidiary cash flows.
Exhibit 21.1 Cash Flow of the Overall MNC
 A key role of the centralized cash management division is
to facilitate the transfer of funds from subsidiaries with
excess funds to those that need funds.
Accommodating
Cash Shortages Technology Used to Facilitate Fund Transfers
A centralized cash management system needs
continual flow of information about currency positions to
determine whether one subsidiary’s shortage of cash can
be covered by another subsidiary’s excess cash.

Monitoring of Cash Positions

The centralized cash management division serves as a
monitor over the subsidiaries because it can detect
potential financial problems.
 ○ Accelerating Cash Inflows using lockboxes and
preauthorized payments.

○ Minimizing currency conversion costs by netting,

Optimizing Cash
using a bilateral netting system or a multilateral
Flow netting system.

○ Managing blocked funds by incurring costs within

the country or using transfer pricing.

○ Managing intersubsidiary cash transfers by using a

leading or lagging strategy.
Exhibit 21.2 Intersubsidiary Payments Matrix
Exhibit 21.3 Intersubsidiary Payments Matrix
 ○ Company related characteristics

If one of the subsidiaries delays payments to other

subsidiaries, the other subsidiaries may be forced to
Complications in borrow. A centralized approach that monitors all
intersubsidiary payments should minimize such problems.
Optimizing Cash
Flow ○ Government restrictions

The existence of government restrictions can disrupt a

cash flow optimization policy.

○ Limitations of Banking Systems

The abilities of banks to facilitate cash transfers for MNCs

vary among countries.
 Determining the Effective Yield: The effective yield of a
bank deposit considers both the interest rate and the rate
Investing Excess of appreciation (or depreciation) of the currency
Cash denominating the deposit and can therefore be very
different from the quoted interest rate on a deposit
denominated in a foreign currency.

r  (1  i f )(1  e f )  1
where r = effective yield on foreign deposit,
if = quoted interest rate,
ef = percentage change in value of currency
 Implications of interest rate parity:

Investing Excess Short term investing can be done on uncovered basis

if IRP holds.
Cash
Use of forward rate as a forecast
◦ Forward rate serves as a break-even point to assess
short term investment decision.
◦ 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.
◦ Conclusions about the Forward Rate: Exhibit 21.4
Exhibit 21.4 Considerations When Investing Excess Cash
 Deriving ef that equates foreign and domestic yields

Use of Exchange 1 r
Rate Forecasts 1  e f
1 if

Use of probability distributions.

Since even expert forecasts are not always accurate, it is
sometimes useful to develop a probability distribution instead of
relying on a single prediction.
Exhibit 21.1 Analysis of Investing in a Foreign Currency
Exhibit 21.6 Analysis of Investing in a Foreign Currency
 Diversifying cash across currencies
to limit the percentage of excess cash invested in each
Investing Excess currency.
Cash
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.
SUMMARY
 MNCs manage their working capital, which includes short-
term assets such as inventory, accounts receivable, and
cash. Multinational management of working capital is
complex for MNCs that have foreign subsidiaries because
each subsidiary must have adequate working capital to
support its operations. The MNC’s parent may use a
centralized perspective in order to monitor cash positions and
to ensure that funds can be transferred among subsidiaries to
accommodate cash deficiencies.

 An MNC’s centralized cash management can monitor cash

flows between subsidiaries and between each subsidiary and
the parent. It can facilitate the transfer of funds from
subsidiaries with excess funds to those that need funds so
that the MNC uses its funds efficiently.
 The common techniques to optimize cash flows are (1) accelerating
cash inflows, (2) minimizing currency conversion costs, (3) managing
blocked funds, and (4) implementing intersubsidiary cash transfers.
The efforts by MNCs to optimize cash flows are complicated by
company-related characteristics, government restrictions, and
characteristics of banking systems.

 MNCs can possibly achieve higher returns when investing excess cash
in foreign currencies that either have relatively high interest rates or
may appreciate over the investment period. If the foreign currency
depreciates over the investment period, however, this may offset any
interest rate advantage of that currency.
Thanks!
Thanks!