INTERNATIONALFINANCIALMANAGEMENT.ppt

Chapter Outline The Management of Multinational Cash Balances Cash Management Systems in Practice Transfer Pricing Related Issues Blocked Funds The Management of International Cash Balances The size of cash balances The currency denomination Where these cash balances are located The Size of Cash Balances The optimal size of the firm’s cash balances depend upon: The Size of Cash Balances Choice of Currency By maintaining cash balances in a particular currency, the MNC is essentially speculating (or hedging?) in that currency. Where Cash Balances are Located. Should the firm have centralized cash management in the home country? Or should the firm let each affiliate handle it locally? Where are borrowing costs lowest and investment returns highest? Cash Management Systems in Practice Multilateral Netting Is an efficient and cost-effective mechanism for settling interaffiliate foreign exchange transactions. Not all countries allow MNCs to net payments By limiting netting, more unnecessary foreign exchange transactions flow through the local banking system. Exposure Netting: an Example Consider a U.S. MNC with three subsidiaries and the following foreign exchange transactions ($000s): Exposure Netting: an Example Bilateral Netting would reduce the number of foreign exchange transactions by half: Multilateral Netting: an Example Consider simplifying the bilateral netting with multilateral netting: Netting with Central Depository Some firms use a central depository as a cash pool to facilitate funds mobilization and reduce the chance of misallocated funds. Netting with Central Depository Consider the net cash flows of the affiliates with the rest of the world: Netting with Central Depository Net cash flows after multilateral netting and net payments from external transactions Transfer Pricing Related Issues The Transfer Price is the price that for accounting purposes, is assigned to goods and services flowing from one division of a firm to another division. Controve