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Ch019
Eun&Resnick4e
CHAPTER19MultinationalCashManagement
TheManagementofInternationalCashBalances
CASEAPPLICATION:
Teltrex’sCashManagementSystem
BilateralNettingofInternalandExternalNetCashFlows
ReductioninPrecautionaryCashBalances
CashManagementSystemsinPractice
TransferPricingandRelatedIssues
CASEAPPLICATION:
MintelProductsTransferPricingStrategy
InternationalFinanceinPractice:
TransferPricingIstheMostImportantTaxIssue
MiscellaneousFactors
BlockedFunds
Summary
CASEAPPLICATION1:
EfficientFundsFlowatEasternTradingCompany
CASEAPPLICATION2:
EasternTradingCompany’sOptimalTransferPricingStrategy
CASEAPPLICATION3:
EasternTradingCompany’sNewMBA
TheManagementofInternationalCashBalances
1Efficientcashmanagementtechniquescan:
a）reducetheinvestmentincashbalancesandforeignexchangetransactionexpenses
b）provideformaximumreturnfromtheinvestmentofexcesscash
c）resultinborrowingatlowestratewhenatemporarycashshortageexists
d）alloftheabove
Answer:
d-p.423
2Cashmanagementrefersto:
a）Thedecisiontograntcredittocustomersortoremain“cashandcarry”.
b）Theinvestmentthefirmhasintransactionbalancesandprecautionarybalances.
c）Adomesticfirm’sinvestmentinforeigncurrency
d）Noneoftheabove
Answer:
b）
3Precautionarycashbalances
a）Arenecessaryincasethefirmhasunderestimatedtheamountofcashneedtocovertransactions
b）Arenecessarytocoverscheduledoutflowsoffundsduringacashbudgetingperiod.
c）Botha）andb）
d）Noneoftheabove
Answer:
a）
CASEAPPLICATION:
Teltrex’sCashManagementSystem
Usethisinformationtoanswerthenexttwoquestions.
ABCTradingCompanyofSingaporepurchasesspicesinbulkfromaroundtheworld,packagesthemintoconsumersizequantitiesandsellsthemthroughsalesaffiliatesinHongKongandtheUnitesStates.Forarecentmonth,thefollowingpaymentsmatrixofinteraffiliatecashflows,statedinSingaporedollars,wasforecasted.
_____________________________________________________________
ABCTradingCompanyPaymentsMatrix（S$000）
_____________________________________________________________
Disbursementsby:
SingaporeHongKongU.S.
Receiptsby:
Singapore--80110
HongKong16--44
U.S.2250--
4Calculate,inSingaporedollars,theamountthattheinteraffiliateforeignexchangetransactionwillbereducedbywithmultilateralnetting.
a）S$152,000
b）S$170,000
c）S$322,000
d）S$405,000
Answer:
b）
Rationale:
CaseApplication1
Thetotalamountforecastedfortheinteraffiliateforeignexchangestransactions
=16,000+22,000+80,000+50,000+110,000+44,000=S$322,000
Withbilateraltrading,itwillbereducedto
=64,000+6,000+88,000=S$158,000
Withmultilateraltrading,itwillbereducedto
=70,000+82,000=S$152,000
Therefore,totalreductionasaresultofmultilateraltrading
=S$322,000–S$152,000=S$170,000
5IfforeignexchangetransactionscostABC0.45percent,whatsavingsresultsfromnetting?
a）S$684
b）S$765
c）S$1,449
d）S$1,823
Answerb）
Rationale:
Savingsfortheplanningperiod=S$170,000×0.0045=S$765
Endfactpattern
BilateralNettingofInternalandExternalNetCashFlows
6ConsideraU.S.MNCwiththreesubsidiariesandthefollowingforeignexchangetransactionsshownatleft.UseBILATERALnettingtoreducethenumberofforeignexchangetransactionsbyhalf.
a）
b）
c）
d）Noneoftheabove
Answer:
a）
Rationale:
fromtheGermantoU.S.:
$80–$60=$20andsoforth
7ConsideraU.S.MNCwiththreesubsidiariesandthefollowingforeignexchangetransactionsshownatleft.UseMULTILATERALnettingtoreducethenumberofforeignexchangetransactions.
a）
b）
c）
Answer:
d）
Rationale:
allofthecashflowsgoaway.
d）Noneoftheabove
8ConsideraU.S.MNCwiththreesubsidiariesandthefollowingforeignexchangetransactionsshownatleft.UseMULTILATERALnettingWITHACENTRALDEPOSITORYtoreducethenumberofforeignexchangetransactions.
a）
b）
c）
d）Noneoftheabove
Answer:
b）
Rationale:
c）istheresultofmultilateralnettingwithoutacentraldepository.
9ABCTradingCompanyofSingaporepurchasesspicesinbulkfromaroundtheworld,packagesthemintoconsumersizequantitiesandsellsthemthroughsalesaffiliatesinHongKongandtheUnitesStates.Forarecentmonth,thefollowingpaymentsmatrixofinteraffiliatecashflows,statedinSingaporedollars,wasforecasted.
_____________________________________________________________
ABCTradingCompanyPaymentsMatrix（S$000）
_____________________________________________________________
Disbursementsby:
SingaporeHongKongU.S.
Receiptsby:
Singapore--80110
HongKong16--44
U.S.2250--
Whichofthefollowingisanaccuratechartoftheircurrentsituation?
a）
b）
c）
d）
Answer:
a）
Rationale:
itpaystoreadthequestion.Thisoneasksforthecurrentsituation,nottheresultofnetting.
10WithaCENTRALIZEDCASHDEPOSITORY
a）ThereislesschanceforanMNC’sfundstobedenominatedinthewrongcurrency.
b）ThecentralcashmanagerhasaglobalviewoftheMNC’soverallcashposition.
c）Thereislesschanceofmislocatedfunds
d）Alloftheabove
Answer:
d）
11WithaCENTRALIZEDCASHDEPOSITORY
a）AMNCcanfacilitatefundmobilization
b）System-wideexcesscashareinvestedatthemostadvantageousrates.
c）System-widecashshortagesareborrowedatthemostadvantageousrates.
d）Alloftheabove
Answer:
d）
CashManagementSystemsinPractice
12NotallcountriesallowMNCsthefreedomtonetpayments,
a）Bylimitingnetting,moreneedlessforeignexchangetransactionsflowthroughthelocalbankingsystem.
b）MNCscanavoidtheserestrictionsbyusingaCentralizedCashDepository
c）MNCscanavoidtheserestrictionsbyusingwiretransfers
d）Bothb）andc）
Answer:
a）
13Withregardtocashmanagementsystemsinpractice,studiessuggestthatthebenefitsofamultilateralnettingsysteminclude:
+
a）Thedecreaseintheexpenseassociatedwithfundstransfer,whichinsomecasescanbeover$1,000foralargeinternationaltransferofforeignexchange.
b）Thesavingsinadministrativetime
c）Thereductioninintracompanyfloat,whichisfrequentlyashighasfivedays,evenforwiretransfers.
d）Alloftheabove
Answer:
d）
14Severalinternationalbanksoffermultilateralnettingsoftwarepackages.Thesepackages
a）Calculatethenetcurrencypositionsofeachaffiliate
b）Canintegratethenettingfunctionwithforeignexchangeexposuremanagement
c）OnlyworkontheMacplatform
d）Botha）andb）
Answer:
d）
15MNCscanreducetheirexchangerateexpense
a）Byusingbilateralnetting
b）Byusingacentralizedcashmanagementsystem
c）Byusingmultilateralnetting
d）Alloftheabove
Answer:
d）
16
Whichofthefollowingstatementsaboutmultilateralnettingsystemarecorrect?
（i）-Eachaffiliatenetsallitsinteraffiliatereceiptsagainstallitsdisbursements
（ii）-Eachaffiliatetransfersorreceivesabalance,dependingonwhetheritisanetpayerorreceiver
（iii）-Thenetfundstobereceivedbytheaffiliateswillequalthenetdisbursementstobemadebytheaffiliates
（iv）-Onlytwoforeignexchangetransactionsarenecessarysincetheaffiliates’netreceiptswillalwaysbeequaltozero
（v）-Onlytwoforeignexchangetransactionsarenecessarysincetheaffiliates’netdisbursementswillalwaysbeequaltozero
a）（i）and（ii）
b）（i）,（ii）,and（iii）
c）（i）,（ii）,（iii）,and（iv）
d）（i）,（ii）,（iii）,and（v）
Answer:
b）
17Assumingthattheinteraffiliatecashflowsareuncorrelatedwithoneanother,calculatethestandarddeviationoftheportfolioofcashheldbythecentralizeddepositoryforthefollowingaffiliatemembers:
ExpectedStandard
AffiliateTransactionsDeviation_______________________________________________
U.S.$100,000$40,000
Canada$150,000$60,000
Mexico$175,000$30,000
Chile$200,000$70,000
a）$34,960.33
b）$139,841.33
c）$104,880.88
d）Noneoftheabove
Answer:
c）
Rationale:
Portfoliostandarddeviation
=$104,881
18
Assumingthattheinteraffiliatecashflowsareuncorrelatedwithoneanother,calculatetheminimumcashbalancetohaveifthefirmfollowsaconservativepolicyofhavingthreestandarddeviationsofcashforprecautionarypurposes
ExpectedStandard
AffiliateTransactionsDeviation_______________________________________________
U.S.$100,000$40,000
Canada$150,000$60,000
Mexico$175,000$30,000
Chile$200,000$70,000
a）$34,960.33
b）$314,642.65
c）$104,880.88
d）Noneoftheabove
Answer:
b）
Rationale:
Portfoliostandarddeviation3×
=3×$104,881
=$314,642.65
TransferPricingandRelatedIssues
19TransferpricingcanhaveaneffectonhowdivisionsofaMNCareperceivedbythelocalbanks.Whichtransferpricewouldleavealocalaffiliatethatimportscomponentsfromtheparentwithlessimpressivefinancialstatements?
a）Hightransferprice
b）Lowtransferprice
c）Noneoftheabove
Answer:
a）
20Foraparentthatsellsgoodstoasubsidiary,transferpricingcanhaveaneffectoninternationalcapitalexpenditureanalysis.AverylowmarkuppolicymakestheAPVofasubsidiary’scapitalexpenditureappear
a）Moreattractive
b）Lessattractive
c）Noimpact
Answer:
a）
21Transferpricingcanhaveaneffectonsharevalue
a）Totheextentthatfinancialmarketsareinefficient
b）Totheextentthatsecurityanalystsdonotunderstandthetransferpricingstrategybeingused.
c）Totheextentthatthirdpartiesbenefitfromthetransferprice
d）Botha）andb）
Answer:
d）
22
Atransferprice
a）
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