UNIVERSITY OF NAIROBI

SCHOOL OF BUSINESS
MASTER OF SCIENCE IN FINANCE
COURSE: DFI 514: WORKING CAPITAL MANAGEMENT
TOPIC: MULTINATIONAL CASHFLOWS
PRESENTED BY: GROUP 3
NO NAME REGISTRATION NO

1. KIMATHI MWIRICHIA D63/75149/2014

2. VINCENT JUMA OKOTH D63/43001/2022

3. JUDY GITUMA D63/43829/2023

4. MAUREEN GOE CHIPA D63/43899/2023

5. ABDULLAHI MOHAMUD UNSHUR D63/43713/2023

6.
MULTINATIONAL CASHFLOWS

Introduction

Cash flow is essentially money that is coming in and out of a business.

Multinational cash flow refers to the cross-border movement of funds for multinational
corporations (Poniachek, 2013). These cash flows relate to various activities such as sales,
expenses, investments, and financing. Effective management of these cash flows is critical
to the financial health of multinational companies (Eshonqulov, 2023).
Multinational companies derive their revenue from the sale of products or services in
different countries. These sales transactions can be denominated in the local currency,
which necessitates the conversion of foreign currency sales into the reporting currency of
the business.
 Multinational corporations (MNCs) also incur costs in the countries where they
operate. These costs include production costs, staff salaries, rent, and administrative
costs. MNCs often invest in assets abroad, for example by establishing subsidiaries,
acquiring other companies or investing in investment projects (Morck, Yeung and
Zhao, 2008).
Cont.
There are three main types of cash flow for businesses with differing frequencies in the
business life:
 Operating: these are the day to day expenses incurred for running the business.
 Investing: these can be termed as the occasional and less frequent expenses required to grow
the business.
 Financing: these cash flows do not occur very often, they refer to cash gained from issuing
debt, equity, or paying dividends, etc.
 MNCs tie up funds when investing in their working capital, which includes short term assets
such as inventory, accounts receivable, and cash. They attempt working capital management
by maintaining sufficient short-term assets to support their operations. Yet, they do not want
to invest excessively in short- term assets because these funds might be put to better use.
EXCHANGE RATES
The exchange rate, also known as the foreign exchange rate, is the price of one
currency expressed in terms of the units of another currency and represents the
number of units of one currency that exchanges for another.
There are two ways to express nominal exchange rates between two currencies,
namely direct quote and indirect quote. The quote is direct when the price of one unit
of foreign currency is expressed in terms of the domestic currency whereas the it is
indirect when the price of one unit of domestic currency is expressed in terms of the
foreign currency.
 An exchange rate has two components, namely a base currency and a counter
currency. In a direct quotation, the foreign currency is the base currency and
domestic currency is the counter currency. In an indirect quotation, the domestic
currency is the base currency, and the foreign currency is the counter currency.
Measures of exchange rates

There are different ways in which exchange rates are measured as

follows:

 Bilateral exchange rates

A bilateral exchange rate refers to the value of one currency comparative to another. It
is the most commonly referenced type of exchange rate. Most bilateral exchange rates
are estimated against the US dollar (USD), as it is the most traded currency globally.
 Cross rates

A cross rate is an exchange rate that is calculated by reference to a third currency. In

other definition, this is a foreign currency exchange transaction involving two
currencies that are both valued against a third currency. The USD is the most commonly
referenced currency that is used to determine the values of the pair being exchanged.
 Trade-Weighted Index (TWI)
While bilateral exchange rates are the most frequently quoted exchange rates, a Trade-
Weighted Index (TWI) provides a broader measure of trends in the value of a currency.
Foreign Exchange Markets

 The foreign exchange market, commonly referred to as the foreign exchange market,

constitutes a dynamic and interconnected arena where currencies are bought, sold

and traded (Cerny, 1994). These markets span the globe and operate around the clock

in different time zones. In this vast network, many participants converge to participate

in currency trading. Financial institutions, including banks and investment firms, play a

central role as they facilitate foreign exchange transactions for clients and manage

their own positions. Governments are also involved in managing the value of their

national currencies and maintaining monetary policies.

Types of Exchange Rate

 Spot and Forward Exchange Rate

Exchange rates can also be classified into two types, namely spot, and forward exchange
rates. The spot exchange rate is the current exchange rate at any given point in time. For
example, if the spot exchange rate between the US dollar (USD) and the euro (EUR) is 1
USD = 0.85 EUR, it means that 1 US dollar can be exchanged for 0.85 euros at that exact
moment in time. Spot rates are commonly used for immediate transactions such as currency
conversions for travel, trade, or investment.
 Floating and Fixed Exchange Rate

Exchange rates do not remain constant. They can be floating or fixed. The exchange rate is
considered to be floating when the currency rate is determined by market conditions.
 Nominal Exchange Rate
The nominal exchange rate represents the relative price of two currencies and indicates
how much of one currency is needed to purchase a unit of another currency. For instance, if
the nominal exchange rate between the Japanese yen (JPY) and the British pound (GBP) is
150 JPY = 1 GBP, it means that 150 Japanese yen are required to buy 1 British pound.
Nominal exchange rates are commonly used for everyday transactions and give a basic
understanding of the relative value between two currencies.
Cont.
 Real Exchange Rate
The real exchange rate adjusts the nominal exchange rate for inflation, providing a
better indication of purchasing power between two currencies. It reflects how much the
real value of goods and services can be exchanged between countries, considering the
impact of price levels. If a country's inflation rate is
Foreign Exchange Market
The exchange rates are settled at the foreign exchange market, which is a
decentralized market where currencies are bought, sold, and exchanged at current or
fixed upon prices. The buying rate is the rate at which the money dealers will buy a
currency and the selling rate refers to the rate at which they will sell a currency. The
foreign exchange rates don’t always remain the same. They are prone to fluctuation
when the value of either of the two-component currencies in a currency pair changes.
Currencies can become valuable or depreciate in value when the demand and supply
factors change.
FACTORS AFFECTING EXCHANGE RATES
Exchange rates are subject to a complex interplay of many different factors that together shape the
value of one currency relative to another.
1. Inflation Rates
Changes in market inflation cause changes in currency exchange rates. A country with a lower
inflation rate than another will see an appreciation in the value of its currency. The prices of goods
and services increase at a slower rate where the inflation is low.
2. Interest Rates
Changes in interest rate affect currency value and dollar exchange rate. Forex rates, interest rates,
and inflation are all correlated. Increases in interest rates cause a country's currency to appreciate
because higher interest rates provide higher rates to lenders, thereby attracting more foreign
capital, which causes a rise in exchange rates. On the other hand, cutting interest rates tends to
cause a depreciation.
3. Country's Current Account/Balance of Payments
A country's current account reflects the balance of trade and earnings on foreign investment. It
consists of total number of transactions including its exports, imports, debt, etc. A deficit in current
account due to spending more of its currency on importing products than it is earning through sale
of exports causes depreciation. Balance of payments fluctuates exchange rate of its domestic
currency.
cont.
4. Government Debt
Government debt is public debt or national debt owned by the central government. Under
some circumstances, the value of government debt can influence the exchange rate. If
markets fear a government may default on its debt, then investors will sell their bonds
causing a fall in the value of the exchange rate. For example, Iceland debt problems in 2008,
caused a rapid fall in the value of the Icelandic currency.
5. Terms of Trade
A trade deficit also can cause exchange rates to change. Related to current accounts and
balance of payments, the terms of trade is the ratio of export prices to import prices. A
country's terms of trade improves if its exports prices rise at a greater rate than its imports
prices. This results in higher revenue, which causes a
6. Change in Competitiveness.
If a country’s goods become more attractive and competitive this will also cause the value
of the exchange rate to rise. For example, if Kenya has long-term improvements in labour
market relations and higher productivity, good will become more internationally competitive
and in long-run cause an appreciation in the Pound. This is a similar factor to low inflation.
Cont.
7. Recession
When a country experiences a recession, its interest rates are likely to fall, decreasing
its chances to acquire foreign capital. As a result, its currency weakens in comparison
to that of other countries, therefore lowering the exchange rate.
8. Speculation
If a country's currency value is expected to rise, investors will demand more of that
currency in order to make a profit in the near future. As a result, the value of the
currency will rise due to the increase in demand. With this increase in currency value
comes a rise in the exchange rate as well.
 If speculators believe the currency value will rise in the future, they will demand
more now to be able to make a profit. This increase in demand will cause the value
to rise. Therefore, movements in the exchange rate do not always reflect economic
fundamentals but are often driven by the sentiments of the financial markets. For
example, if markets see news which makes an interest rate increase more likely, the
value of the pound will probably rise in anticipation.
FOREIGN EXCHANGE EXPOSURE