MultinationalCashManagementChapterNineteenCopyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ChapterOutlineTheManagementofInternationalCashBalancesCaseApplication:Teltrex’sCashManagementSystemBilateralNettingofInternalandExternalNetCashFlowsReductioninPrecautionaryCashBalancesCashManagementSystemsinPractice19-2Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ManagementofInternationalCashBalancesCashmanagementreferstotheinvestmentthefirmhasintransactionbalancestocoverscheduledoutflowsoffundsduringacashbudgetingperiodandthefundsthefirmhastiedupinprecautionarycashbalancesPrecautionarycashbalancesarenecessaryincasethefirmhasunderestimatedtheamountneededtocovertransactionsManyoftheskillsnecessaryforeffectivecashmanagementarethesameregardlessofwhetherthefirmhasonlydomesticoperationsorifitoperatesinternationally19-3Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CaseApplication:Teltrex’sCashManagementSystemTeltrexisaU.S.multinationalfirmwithheadquartersinCalifornia’sSiliconValley.Itmanufactureslow-pricedquartzwatcheswhichitmarketsthroughoutNorthAmericaandEurope.InadditiontoitsmanufacturingfacilitiesinCalifornia,TeltrexhasthreesalesaffiliatesinCanada,Germany,andtheUnitedKingdom.Foundationofanycashmanagementsystemisitscashbudget,aplandetailingthetimeandthesizeofexpectedcashreceiptsanddisbursements19-4Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.1

CashReceiptsandDisbursementsMatrixforTeltrex($000)19-5Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ExpectationsofTeltrexperExhibit19.119-6Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.1,onthepreviousslide,showstheU.S.parentexpectstoreceive$265kfromthefollowing:Equivalentof$30,000inCanadiandollarsfromCanadianaffiliate,theequivalentof$35,000ineurosfromGermanaffiliate,andequivalentof$60,000inBritishpoundssterlingfromU.K.affiliate$140,000fromexternalpartiesU.S.parentexpectstodisbursethefollowing:$20,000toCanadianaffiliate,$10,000toGermanaffiliate,and$40,000toBritishaffiliate$120,000toexternalpartiesCaseApplication:NettingSystemsLet’sfirstconsidertheinteraffiliatetransactionsWithoutanettingpolicy,12foreignexchangetransactionswilltakeplaceamongthefouraffiliatesIngeneral,ifthereareNaffiliates,therewillbeamaximumofN(N?1)transactions;inourcase4(4?1)=1219-7Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.3|Teltrex’sInteraffiliateForeignExchangeTransactionsWithoutNetting($000)19-8Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ImplicationsofExhibit19.319-9Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.3,onthepreviousslide,indicatestheequivalentof$350,000infundsflowsamongthefouraffiliatesin12foreignexchangetransactionsNeedlessuseoftimeandwasteofcorporatefunds12transactionscanbereducedatleastbyhalfthroughbilateralnetting,whereeachpairofaffiliatesdeterminesthenetamountduebetweenthem,andonlythenetamountistransferredU.S.parentandCanadianaffiliatewouldnetthe$30,000andthe$20,000tobereceivedfromoneanotherResultisthatonepaymentismade;CanadianaffiliatepaysU.S.parentanamountequivalentto$10,000Exhibit19.4|BilateralNettingofTeltrex’sInteraffiliateForeignExchangeTransactions($000)19-10Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CaseApplication:MultilateralNetting19-11Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Underamultilateralnettingsystem,eachaffiliatenetsallitsinteraffiliatereceiptsagainstallitsdisbursementsItthentransfersorreceivesthebalance,respectively,ifitisanetpayerorreceiverNetfundstobereceivedbytheaffiliateswillequalthenetdisbursementstobemadebytheaffiliatesExhibit19.5|MultilateralNettingofTeltrex’sInteraffiliateForeignExchangeTransactions($000)19-12Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CaseApplication:CentralizedCashDepository19-13Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.MultilateralnettingsystemrequiresacertaindegreeofadministrativestructureAtminimum,anettingcentermanager,onewhodeterminestheamountofthenetpaymentsandwhichaffiliatesaretomakeorreceivethem,isrequiredNettingcenterdoesnotimplythattheMNChasacentralcashmanagerUnderacentralizedcashmanagementsystem,unlessotherwiseinstructed,allinteraffiliatepaymentswillflowthroughthecentralcashdepositoryExhibit19.6|MultilateralNettingofTeltrex’sInteraffiliateForeignExchangeTransactionswithaCentralizedDepository($000)19-14Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CaseApplication:CentralizedCashDepository(Continued)19-15Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.BenefitsofacentralcashdepositoryderivemainlyformthebusinesstransactionstheaffiliateshavewithexternalpartiesIntotal,$40,000ofnetreceiptsareexpectedfortheMNCasawholeCaseApplication:CentralizedCashDepository(Concluded)19-16Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Withacentralizedcashdepository,excesscashisremittedtothecentralcashpoolAssuch,centralcashmanagerarrangestocovershortagesofcashLessofachanceformislocatedfunds(i.e.,fundsdenominatedinwrongcurrency)andcentralcashmanagerwillknowbestborrowingandinvestingratesCentralizedsystemfacilitatesfundsmobilization,wheresystemwidecashexcessesareinvestedatthemostadvantageousratesandcashshortagesarecoveredbyborrowingatthemostfavorableratesExhibit19.8|FlowofTeltrex’sNetCashReceiptsfromTransactionswithaCentralizedDepository($000)19-17Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.BilateralNettingofInternalandExternalNetCashFlowsTwosetsofnetcashflowscanbebilaterallynetted,withtheresultingnetsumsgoingthroughthecentraldepositoryFurtherreducethenumber,size,andexpenseofforeignexchangetransactionsfortheMNC19-18Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.10|NetCashFlowsofTeltrexAffiliatesthroughtheCentralCashDepositoryafterMultilateralNettingPaymentsfromExternalTransactions($000)19-19Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.ReductioninPrecautionaryCashBalancesAdditionalbenefitofacentralizedcashdepositoryisthatMNC’sinvestmentinprecautionarycashbalancescanbesubstantiallyreducedwithoutreductioninabilitytocoverunforeseenexpensesPrecautionarycashbalancecoversunexpectedtransactionsduringthebudgetperiodUnderadecentralizedcashmanagementsystem,eachaffiliatewouldholditsowntransactionbalanceandprecautionarycashSizeofbalancedependsondegreeofsafetydesiredbyfirmtomeetunexpectedtransactions19-20Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.Exhibit19.11|TransactionandPrecautionaryCashBalancesHeldbyEachTeltrexAffiliateunderaDecentralizedCashManagementSystem19-21Copyright?2021bytheMcGraw-HillCompanies,Inc.Allrightsreserved.CashManagementSystemsinPracticeMultilateralnettingisanefficientandcost-effectivemechanismforhandlinginteraffiliateforeignexchangetransactionsNotallcountriesallowMNCsthefreedomtonetpaymentsSrinivasanandKim(1986)study:ConcludethatthepaymentsnettingsystemshouldideallybeintegratedwiththeMNC’sglobalcashmanagementsystemNettingpaymentsinisolationfromcashmanagementstrategiescouldresultinsuboptimalnettingdecisions19-22Copyright?2021by