19-06-2013, 12:31 PM
INTERNATIONAL CASH MANAGEMENT
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INTRODUCTION
• International cash management is the set of activities determining the levels of cash balances held throughout the MNC and the process of its movement cross-border
• The objectives of effective cash capital management in international finance are
(i) allocation of short term investments and cash balance between currencies and countries to maximize overall profit, and
(ii) to borrow in different markets at minimum cost
(iii) to manage currency exposures
• Financing Working Capital
• Investing Surplus Funds
• Financing short term deficits
• Cash transmission
CENTRALISED AND DECENTRALISED CASH MANAGEMENT
• A multinational corporation with subsidiaries in different parts of the world has cash flows in a variety of currencies and countries.
• It can leave cash management to individual subsidiaries (who will also manage their currency exposures) or have a centralized cash management system.
CENTRALISED CASH MANAGEMENT
• MNC can create a "Cash Management Center" which may be a part of the parent company, located at one of the subsidiaries or a separate company made for this purpose.
• Pooling: Pooling occurs when cash is held as well as managed in a central location.
• The advantage of pooling is that cash needs can be met whenever they occur without having to keep precautionary balances in each country.
• Advantages
• Netting: If the divisions of MNC are left to manage their own cash it can happen for example that one division is hedging a long pound position while at the same time another division is hedging a short pound position of the same maturity.
• This situation can, be avoided by NETTING, which, involves calculating the overall corporate position in each currency
INTERNATIONAL CAPITAL BUDGETING
• Capital budgeting
– studies the benefits, costs and risks of an investment
– Managers can reasonably compare different investment alternatives within and across countries
• In principle
– capital budgeting: the same for international and domestic
– accept positive NPV projects
• In practice, international capital budgeting is more challenging
• Strategic considerations are often as important as financial considerations for evaluating international projects.
• Complicated process:
– Must distinguish between cash flows to project and those to parent
– Political and economic risk can change the value of a foreign investment
– Connection between cash flows to parent and the source of financing must be recognized