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Chapter 21
International Cash Management
Lecture Outline
Multinational Working Capital Management
Subsidiary Expenses
Subsidiary Revenue
Subsidiary Dividend Payments
Subsidiary Liquidity Management
Centralized Cash Management
Accommodating Cash Shortages
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
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
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
International Cash Management 2
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 what
is implied by the forward rate. If it has confidence that the future spot rate will be higher than today’s
forward rate, it may be willing to invest in a foreign currency.
© 2015 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
