Chapter 17

Managing Multinational Cash

Flows
Order
Order
Placed
Placed

Order
Order
Received
Received

Sale
Sale

Payment
PaymentSent
Sent Cash
Cash
Received
Received
Accounts
Collection
Accounts
Collection
<<Inventory
Inventory>> << Receivable
Receivable >> << Float
Float >>

Accounts
Accounts
<< Payable
Payable >>

Disbursement
Disbursement
<< Float
>>
Float

Invoice
InvoiceReceived
Received

Payment
PaymentSent
Sent
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Time
Time==>
==>

Cash
CashDisbursed
Disbursed

2005 by Thomson Learning, Inc.

Learning Objectives

Have an appreciation of the development of the

current exchange rate system.
Understand the basic driving forces causing
exchange rates to fluctuate.
Gain a basic understanding of the various means
by which firms create internal structures to
manage exchange rate fluctuations.
Have an appreciation for the differences between
the U.S. and foreign banking systems.

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2005 by Thomson Learning, Inc.

Exchange Rates

Fixed versus floating

Spot rates
Forward rates
Futures rates

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2005 by Thomson Learning, Inc.

Foreign Exchange Quotes

Spot and forward rate quotes

US $ equiv
British (Pound)
1.8486
30-Day Forward
1.8443
90-Day Forward
1.8355
180-Day Forward
1.8219
Japan (Yen)
30-Day Forward
90-Day Forward
180-Day Forward

.009401
.009411
.009428
.009455

Switzerland (Franc)
30-Day Forward
60-Day Forward
180-Day Forward

.8195
.8202
.8213
.8230
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2005 by Thomson Learning, Inc.

Factors Affecting Exchange Rates

Relative level of interest rates in one country

compared to another
Relative rate of inflation in one country compared
to another
Governments central bank reaction to changes in
exchange rates caused by economic circumstances
Economic and political factors

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2005 by Thomson Learning, Inc.

Foreign Exchange Exposure

Economic exposure
the possibility that the long-term net present value of a firms
expected cash flows will change due to unexpected changes in
exchange rates

Transaction exposure
the gains or losses associated with the settlement of business
transactions denominated in different currencies

Translation exposure
results when the balance sheet and income statement of a
foreign subsidiary are translated into the parent companys
domestic currency for consolidated financial reporting
purposes

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2005 by Thomson Learning, Inc.

Corporate Structure for Global

Liquidity Management

Centralize or not? The evidence is that financial

executives are
building global liquidity pyramids that consolidate net cash
positions at the national level, then the broad regional level, and
finally at the enterprise level,
leveraging capacity of their ERP systems and treasury work
stations to get timely cash balance reports system wide, and
reducing number of banks in their system.

Survey results of U.S.-based firms have centralized

their treasury structures with 30% fully
centralized and 62% centrally coordinating
treasury functions from HQ.
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2005 by Thomson Learning, Inc.

Managing Foreign Exchange

Exposure

Avoidance
Leading and Lagging
Netting
Re-invoicing
Hedging

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2005 by Thomson Learning, Inc.

A Typical Multilateral Netting

System
Subsidiary
A

Net amount owe

Subsidiary
A

Netting
Agent
Net amount

Subsidiary
B

Subsidiary
C

Subsidiary
B

Payment Flows Without Netting

Subsidiary
C

Net Payment Flows W

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2005 by Thomson Learning, Inc.

Features of Non-US Banking

Systems

Check clearing
Interest on demand deposits
Pooling
Governmental policies and restrictions
Cash management services

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2005 by Thomson Learning, Inc.

Summary

The chapter began with a brief history of exchange rate

system.
Different forms of currency quotations were described
including: spot, forward, and futures.
Three types of foreign exchange exposure were
introduced including: economic, transaction, and
translation exposure.
The chapter discussed a variety of techniques for
managing foreign currency exposure.
Complicating factors of managing international cash
flows including: different regulations, value dating, and
fluctuating currency values.
Copyright

2005 by Thomson Learning, Inc.