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CHAPTER 19 MULTINATIONAL CASH MANAGEMENT
ANSWERS & SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS
QUESTIONS
1. Describe the key factors contributing to effective cash management within a firm. Why is the
cash management process more difficult in a MNC?
Answer: An effective cash management system should be based on a cash budget that
projects expected cash inflows and outflows over some planning horizon. It provides for the
systematic receipt and disbursement of cash. It also provides for funds mobilization, where
2. Discuss the pros and cons of a MNC having a centralized cash manager handle all
investment and borrowing for all affiliates of the MNC versus each affiliate having a local
manager who performs the cash management activities of the affiliate.
Answer: Under a centralized cash management system, the cash manager will have a global
view of the cash requirements of the MNC. There will be less chance that funds will be
mislocated, i.e., denominated in the wrong currency. Additionally, under a global view,
Under a decentralized system, the local cash manager is given more responsibility for
managing the cash needs of the affiliate than under a centralized system. Consequently, the
local cash management position serves as good training for higher level positions within the
PROBLEMS
1. Assume that interaffiliate cash flows are uncorrelated with one another. Calculate the
standard deviation of the portfolio of cash held by the centralized depository for the following
affiliate members:
Expected Standard
Affiliate Transactions Deviation
_______________________________________________
U.S. $100,000 $40,000
Canada $150,000 $60,000
Mexico $175,000 $30,000
Chile $200,000 $70,000
Solution: Portfolio standard deviation = Square root of [($40,000)2 + ($60,000)2 +
MINI CASE: EFFICIENT FUNDS FLOW AT EASTERN TRADING COMPANY
The Eastern Trading Company of Singapore purchases spices in bulk from around the world,
packages them into consumer-size quantities, and sells them through sales affiliates in Hong
Kong, the United Kingdom, and the United States. For a recent month, the following payments
matrix of interaffiliate cash flows, stated in Singapore dollars, was forecasted. Show how
Eastern Trading can use multilateral netting to minimize the foreign exchange transactions
necessary to settle interaffiliate payments. If foreign exchange transactions cost the company .
5 percent, what savings result from netting?
Eastern Trading Company Payments Matrix (S$000)
Disbursements
Receipts Singapore Hong Kong U.K. U.S. Total
Receipts
Singapore -- 40 75 55 170
Hong Kong 8 -- -- 22 30
U.K. 15 -- -- 17 32
U.S. 11 25 9 -- 45
Total
disbursements
34 65 84 94 277
Suggested Solution to Mini Case 1: Efficient Funds Flow at Eastern Trading Company
Bilateral Netting
Multilateral Netting
Singapore Hong Kong
United
United
Kingdom
S$8
S$40
S$75S$15 S$25
S$17
S$22
S$9
S$11
Singapore Hong Kong
United
States
United
Kingdom
S$32
S$60 S$3
S$8
S$44
Without netting, S$277,000 of interaffiliate foreign exchange transactions occur among the
four affiliates of Eastern Trading. With multilateral netting, interaffiliate foreign exchange
MINI CASE: EASTERN TRADING COMPANY’S NEW M.B.A.
The Eastern Trading Company of Singapore presently follows a decentralized system of cash
management where it and its affiliates each maintain their own transaction and precautionary
cash balances. Eastern Trading believes that it and its affiliates’ cash needs are normally
distributed and independent from one another. It is corporate policy to maintain two and one-
half standard deviations of cash as precautionary holdings. At this level of safety there is a
99.37 percent chance that each affiliate will have enough cash holdings to cover transactions.
A new MBA hired by the company claims that the investment in precautionary cash balances is
needlessly large and can be reduced substantially if the firm converts to a centralized cash
management system. Use the projected information for the current month, which is presented
below, to determine the amount of cash Eastern Trading needs to hold in precautionary
balances under its current decentralized system and the level of precautionary cash it would
need to hold under a centralized system. Was the new MBA a good hire?
Singapore Hong Kong
S$35
S$52
Affiliate Expected
Transactions
One Standard
Deviation
Singapore S$125,000 S$40,000
Hong Kong 60,000 25,000
United Kingdom 95,000 40,000
United States 70,000 35,000
Suggested Solution to Mini Case 2: Eastern Trading Company’s New M.B.A.
Affiliate Expected
Transactions
(a)
One Standard
Deviation
(b)
Expected Needs
plus Precautionary
(a + 2.5b)
Singapore S$125,000 S$40,000 S$225,000
Hong Kong 60,000 25,000 122,500
Eastern Trading is holding S$350,000 to cover expected transactions and S$350,000 as
precautionary balances among the four affiliates. In total, it is holding S$700,000 under its
$71,063
S
=
)
$35,000
(S
+
)
$40,000
(S
+
)
$25,000
(S
+
)
$40,000
(S
=
.
Dev
.
Std
Portfolio
2
2
2
2
Hence, under a centralized system, Eastern Trading would continue to need S$350,000 to cover
expected transactions, but precautionary cash balances could be reduced to $177,658
