International Cash Management Presented by: Ibnu Fadhli ( ) Hasepti ( ) International Financial Management Class Magister Management Economics Faculty Andalas University

International Cash Management 1) Optimization of cash flows and investment of excess cash (positif cash) “Cash Inflow > Cash Outflow” 2) How to understand the advantages and disadvantages of investing cash in foreign markets to make intrenational cash management decision that maximaize the value of the MNC

1. Multinational Working Capital 1.)Working Capital items: a. Cash b. Bank Current Account c. Current Account Receivable d. Inventory 2.)Working Capital Management is how to maintain the current assets to support their operation and business.

Multinational Working Capital Management Aspecs 1.)Subsidiary Expense a. For MNC have to forecasting future outflow of payments if is purchase are international rather than domestic because of the exchange rate fluctuation. b. It may wosh to maintain a large inventory of supplies and raw material so that can cut down on purchase in foreign currencies. 2.) Subsidiaries Revenue a. Subsidiaries exports are directly impacted of currency volatile. The importers’ demand for finished products will most likely decrease if the invoice currency appreciate. b. Sales can often be increased by relaxing credit standard.

3.)Subsidiary Divedent Payment a. When dividend payment are known in advance and dominated in the subsidiary’s currencies, forecasting cash flows is easier for the subsidiary, but vice versa. b. The level dividend paid by subsidiaries to the parent are depend on the liquidity needs of each subsidiary, potential uses of fund at various subsidiary location. 4.)Subsidiary Liquidity Management a. Invest the excess cash or borrow to cover its cash deficiencies. b. Maintain adequate liquidity without substantial cash balance. Potential excess to fund is more relevance than cash on hand.

2. Centralized Cash Management  A key component of working capital is cash management. 1. MNC have large cash flow in various currencies. Cash inflow and cash outflow will not balance in any currency in any given month. 2. Decentralized management is not optimal because it will force the MNC overall to maintain a large investment in cash than is necessary. 3. MNC normally use centralized cash management to monitor and manage the parent-subsidiary and intersubsidiary cash flows.

3. Optimizing Cash Flows  Optimizing techniques 1. Accelerating cash inflow a. Establish lockboxes (electronic payment) around the world, and a bank usually processes incoming checka at a lockbox on a daily basis and deposit the fund in the firm account. 2. Minimizing currency convertion costs a. Reducing the transaction cost tah result from currency convertion. b. Implement centralized cash management group. c. Billateral netting system d. Multilateral netting system

3. Managing blocked fund a. Transfer pricing strategy, when subsidiaries are restricted from transferring funds to the parent, the parent may instruct the subsidiary to obtain financing from a local bank rather than from parent. 4. Managing intersubsidiary cash transfer a. Subsidiaries pay for supplies from another subsidiary at the time they are trabsferred. Thus MNC needs to be aware of any laws that restrict the use of this strategy.

5. Complication in optimizing cash flow The categories: a. Company related characteristics i. Ex: Subsidiaries delays payment to other subsidiaries for supplies received, the other subsidiaries be forced to borrow until the payment arrive. b. Government restrictions, or i. Some government prohibit the use of a netting system. c. Limitation of banking system i. The abilities of bank to facilitate cash transfers for MNCs vary among country.

4. Investing Excess Cash 1. Benefits of Investing in a Foreign Currency a. MNC’s excess fund can be invested in domestic or foreign short-term securities, which is higher yield. b. The effective yield formula: r = (1+if)(1+ef)-1 2. Risk of Investing in a Foreign Currency a. MNCs typically attempt to invest their cash in short term securities that are free from credit risk. 3. Hedging the Investment in a Foreign Currency 4. Break even Point from Investing in an Foreign Currency 5. Using a Probality Distribution to Enhance the Investment Decision 6. Investing in a Portfolio of Currencies 7. Dynamic Hedging

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