PROBLEMS
1. Euroshipping Corporation maintains separate production and distribution facilities
in Sweden, France, Spain, and Italy. The corporate headquarters is in France. As a
consultant to the treasurer of Euroshipping, you have been asked to estimate how
much money the firm could save by creating a centralized cash management pool.
Currently, each affiliate maintains precautionary cash balances equal to 3 standard
deviations above its expected demand for cash.
Affiliate Mean Demand for
Money
1 Standard
Deviation
Swedish €25,000,000 €7,000,000
French €50,000,000 €13,000,000
Italian €35,500,000 €10,000,000
Spanish €20,000,000 €6,000,000
By how much could Euroshipping reduce its overall demand for cash if it were to
create a centralized cash pool for the four affiliates? (Assume that the cash needs are
normally distributed and are independent of each other.)
2. Euroshipping is also considering developing a multilateral netting system.
a. Given the cumulative monthly payments in the following payments matrix,
derive the minimum transfers that could be made.
Euroshipping Intracompany Payments Matrix (millions of euros)
Paying Affiliate
Receiving
Affiliate
Swedish French Italian Spanish
Swedish — 16 14 18
French 19 — 12 15
Italian 22 7 — 11
Spanish 9 15 3 —
b. If the transaction costs on these fund transfers are 0.45%, how much would the
company save by switching to a multilateral netting system?
3. Suppose the euro borrowing and lending rates for a German parent and its Spanish
affiliate for a 90-day period are as follows:
Borrowing Rate
(in percent per annum)
Lending Rate
(in percent per annum)
German parent 9.3 8.1
Spanish affiliate 9.6 7.9
In each of the following cases, determine the direction funds should flow and the return
to the MNC of transferring EUR1,000,000:
a. The German parent has positive funds; the Spanish affiliate has negative funds.
b. The German parent has negative funds; the Spanish affiliate has positive funds.
c. The German parent has positive funds; the Spanish affiliate has positive funds.
d. The German parent has negative funds; the Spanish affiliate has negative funds.