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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
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
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
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
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
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?
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
United Kingdom
95,000
40,000
195,000
United States
70,000
35,000
157,500
Total
S$350,000
S$700,000
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
decentralized cash management system.
Copyright © 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent
of McGraw-Hill Education.
cover expected transactions, but precautionary cash balances could be reduced to $177,658
(= 2.5 x S$71,063). Thus, the investment in precautionary cash can be reduced by S$172,342
(= S$350,000 – 177,658). The new MBA was a good hire.
