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Managing Multinational Cash Flows: Strategies and Structures for Global Liquidity

Learn how to navigate international cash flows, exchange rates, and banking systems with effective management techniques to mitigate risks and optimize liquidity. Explore factors impacting exchange rates, foreign exchange exposure, and corporate structures for efficient global cash management. 8 Relevant

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Managing Multinational Cash Flows: Strategies and Structures for Global Liquidity

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  1. Chapter 17Managing Multinational Cash Flows • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

  2. 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.

  3. Exchange Rates • Fixed versus floating • Spot rates • Forward rates • Futures rates

  4. Foreign Exchange Quotes • Spot and forward rate quotesUS $ equivBritish (Pound) 1.8486 30-Day Forward 1.8443 90-Day Forward 1.8355 180-Day Forward 1.8219Japan (Yen) .009401 30-Day Forward .009411 90-Day Forward .009428 180-Day Forward .009455Switzerland (Franc) .8195 30-Day Forward .8202 60-Day Forward .8213 180-Day Forward .8230

  5. 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 • Government’s central bank reaction to changes in exchange rates caused by economic circumstances • Economic and political factors

  6. Foreign Exchange Exposure • Economic exposure • the possibility that the long-term net present value of a firm’s 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 company’s domestic currency for consolidated financial reporting purposes

  7. 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.

  8. Managing Foreign Exchange Exposure • Avoidance • Leading and Lagging • Netting • Re-invoicing • Hedging

  9. A Typical Multilateral Netting System Subsidiary A Net amount owed Subsidiary A Netting Agent Net amount Subsidiary B Subsidiary C Subsidiary B Subsidiary C Payment Flows Without Netting Net Payment Flows With Netting

  10. Features of Non-US Banking Systems • Check clearing • Interest on demand deposits • Pooling • Governmental policies and restrictions • Cash management services

  11. 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.

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