Q1 Discuss the general functions involved in international cash management. Explain how the MNC’s optimization of cash flow can distort the profits of each subsidiary.

ANSWER: The general functions of international cash management are optimizing cash flows and investing excess cash.  These functions combined will lead to efficient usage of funds.

When subsidiaries adjust their cash transactions between each other to reduce taxes or financing costs, their individual performances are distorted.  For example, a subsidiary that makes a late payment to another subsidiary (due to its shortage of funds) benefits in that it avoided a shortterm loan by delaying payment.  The recipient subsidiary was hampered due to not receiving funds earlier (since the present value of the late payment is lower).

Q2 Explain the benefits of netting. How can a centralized cash management system be beneficial to the MNC?

ANSWER: Netting is a centralized compilation of intersubsidiary cash flows.  It is designed to reduce currency conversion costs and processing costs associated with payments between subsidiaries.  By specifying a single net payment to be made instead of all individual payments owed between subsidiaries, transactions costs are reduced and cash flows may be forecasted more accurately.

A centralized cash management system is beneficial in that it allows for netting, which can reduce transactions costs and improve cash budgeting.  In addition, it can increase yields on shortterm investments by pooling excess cash of various subsidiaries.

Q3 How can an MNC implement leading and lagging techniques to help subsidiaries in need of funds?

ANSWER: A subsidiary in need of funds would receive cash inflows from another subsidiary sooner than is required.  This early payment provides the necessary funds.  If the subsidiary in need of funds is making payment, it may be allowed by the MNC parent or recipient subsidiary to delay on its payment.

Q6 Why would a U.S. firm consider investing shortterm funds in euros even when it does not have any future cash outflows in euros?

ANSWER: The interest rate on the euro may be higher, or the euro may have a high probability of appreciating. Also the firm may invest in euros today to hedge a future payment in euros.

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