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CHAPTER19MULTINATIONALCASHMANAGEMENT

ANSWERS&SOLUTIONSTOEND-OF-CHAPTERQUESTIONSANDPROBLEMS

QUESTIONS

1.Describethekeyfactorscontributingtoeffectivecashmanagementwithinafirm.WhyisthecashmanagementprocessmoredifficultinaMNC?

Answer:Aneffectivecashmanagementsystemshouldbebasedonacashbudgetthatprojectsexpectedcashinflowsandoutflowsoversomeplanninghorizon.Itprovidesforthesystematicreceiptanddisbursementofcash.Italsoprovidesforfundsmobilization,wherecashshortagesarecoveredbyborrowingatthemostfavorableratesandsurplusfundsareinvestedatthemostadvantageousrates.WithinaMNCthecomplexityofthecashmanagementprocessiscompoundedbecausethefirmdoesbusinessinavarietyofcurrencies,andhencethecostofforeignexchangetransactionsisanadditionaldimensiontobemanaged.

2.DiscusstheprosandconsofaMNChavingacentralizedcashmanagerhandleallinvestmentandborrowingforallaffiliatesoftheMNCversuseachaffiliatehavingalocalmanagerwhoperformsthecashmanagementactivitiesoftheaffiliate.

Answer:Underacentralizedcashmanagementsystem,thecashmanagerwillhaveaglobalviewofthecashrequirementsoftheMNC.Therewillbelesschancethatfundswillbemislocated,i.e.,denominatedinthewrongcurrency.Additionally,underaglobalview,transactionexposurefortheMNCcanbemoreefficientlymanaged.Moreover,acentralizedsystemreadilyallowsforinvestingexcesscashatthemostadvantageousratesandborrowingtocovercashshortagesatthemostfavorablerates.

Underadecentralizedsystem,thelocalcashmanagerisgivenmoreresponsibilityformanagingthecashneedsoftheaffiliatethanunderacentralizedsystem.Consequently,thelocalcashmanagementpositionservesasgoodtrainingforhigherlevelpositionswithintheaffiliateorMNC.Also,underadecentralizedsystem,localbankrelationshipsarebetterdevelopedsincetheaffiliateconductsmoreofitscashmanagementfunctionsatthelocallevel.Thismayproveimportantiffundsneedtobeborrowedlocally.Butoverall,thebenefitsofacentralizedcashmanagementsystemtendtooutweighitsdisadvantages.

PROBLEMS

1.Assumethatinteraffiliatecashflowsareuncorrelatedwithoneanother.Calculatethestandarddeviationoftheportfolioofcashheldbythecentralizeddepositoryforthefollowingaffiliatemembers:

ExpectedStandard

AffiliateTransactionsDeviation_______________________________________________

U.S. $100,000 $40,000

Canada $150,000 $60,000

Mexico $175,000 $30,000

Chile $200,000 $70,000

Solution:Portfoliostandarddeviation=Squarerootof[($40,000)2+($60,000)2+($30,000)2+($70,000)2]=$104,881.

MINICASE:EFFICIENTFUNDSFLOWATEASTERNTRADINGCOMPANY

TheEasternTradingCompanyofSingaporepurchasesspicesinbulkfromaroundtheworld,packagesthemintoconsumer-sizequantities,andsellsthemthroughsalesaffiliatesinHongKong,theUnitedKingdom,andtheUnitedStates.Forarecentmonth,thefollowingpaymentsmatrixofinteraffiliatecashflows,statedinSingaporedollars,wasforecasted.ShowhowEasternTradingcanusemultilateralnettingtominimizetheforeignexchangetransactionsnecessarytosettleinteraffiliatepayments.Ifforeignexchangetransactionscostthecompany.5percent,whatsavingsresultfromnetting?

EasternTradingCompanyPaymentsMatrix(S$000)

Disbursements

Receipts

Singapore

HongKong

U.K.

U.S.

TotalReceipts

Singapore

--

40

75

55

170

HongKong

8

--

--

22

30

U.K.

15

--

--

17

32

U.S.

11

25

9

--

45

Totaldisbursements

34

65

84

94

277

SuggestedSolutiontoMiniCase1:EfficientFundsFlowatEasternTradingCompany

Singapore

HongKong

UnitedKingdom

S$8

S$40

S$25

S$17

S$22

S$9

S$11

S$55

S$15

S$75

UnitedStates

BilateralNetting

Singapore

HongKong

UnitedKingdom

S$32

S$3

S$8

S$44

S$60

UnitedStates

MultilateralNetting

Singapore

HongKong

UnitedKingdom

S$35

S$49

S$52

UnitedStates

Withoutnetting,S$277,000ofinteraffiliateforeignexchangetransactionsoccuramongthefouraffiliatesofEasternTrading.Withmultilateralnetting,interaffiliateforeignexchangetransactionsarereducedtoS$136,000,orbyS$141,000.Thesavingsare.005xS$141,000=S$705fortheplanningperiod.

MINICASE:EASTERNTRADINGCOMPANY’SNEWM.B.A.

TheEasternTradingCompanyofSingaporepresentlyfollowsadecentralizedsystemofcashmanagementwhereitanditsaffiliateseachmaintaintheirowntransactionandprecautionarycashbalances.EasternTradingbelievesthatitanditsaffiliates’cashneedsarenormallydistributedandindependentfromoneanother.Itiscorporatepolicytomaintaintwoandone-halfstandarddeviationsofcashasprecautionaryholdings.Atthislevelofsafetythereisa99.37percentchancethateachaffiliatewillhaveenoughcashholdingstocovertransactions.

AnewMBAhiredbythecompanyclaimsthattheinvestmentinprecautionarycashbalancesisneedlesslylargeandcanbereducedsubstantiallyifthefirmconvertstoacentralizedcashmanagementsystem.Usetheprojectedinformationforthecurrentmonth,whichispresentedbelow,todeterminetheamountofcashEasternTradingneedstoholdinprecautionarybalancesunderitscurrentdecentralizedsystemandthelevelofprecautionarycashitwouldneedtoholdunderacentralizedsystem.WasthenewMBAagoodhire?

Affiliate

ExpectedTransactions

OneStandard

Deviation

Singapore

S$125,000

S$40,000

HongKong

60,000

25,000

UnitedKingdom

95,000

40,000

UnitedStates

70,000

35,000

SuggestedSolutiontoMiniCase2:EasternTradingCompany’sNewM.B.A.

Affiliate

ExpectedTransactions(a)

OneStandardDeviation

(b)

ExpectedNeedsplusPrecautionary(a+2.5b)

Singapore

S$125,000

S$40,000

S$225,000

HongKong

60,000

25,000

122,500

UnitedKingdom

95,000

40,000

195,000

UnitedStates

70,000

35,000

157,500

Total

S$