A British firm has a subsidiary in the U.S., and a U.S. firm, known to the British firm, has a subsidiary in Britain

Question

Define and then provide an example for each of the following management techniques for reducing the firm's operating cash flows. The following are techniques to consider:
a) matching currency cash flows
b) risk-sharing agreements
c) back-to-back or parallel loans

Answer 1

Answer: a) Matching currency cash flows requires that the British firm with dollar receivables must establish an equivalent dollar payable. They could do this by borrowing dollars and repaying the loan with the proceeds from the receivables account. Or they could move all or part of their operations to the U.S. so that both receivables and payables would be in U.S. dollars.
b) Risk-sharing agreements are contractual clauses whereby both parties agree to an acceptable range of exchange rates at the time the international sale is made. A spot rate at time of exchange outside of the agreed upon range results in an adjustment made to the actual exchange rate that shares the difference between the spot rate and the acceptable range of exchange rates.
c) Back-to-back loans provide for parent-subsidiary cross border financing without incurring direct currency exposure. For example, using our British and U.S. firms, the British firm could lend pounds to the U.S. subsidiary in Britain at the same time that the U.S. firm lends an equivalent amount of dollars to the British subsidiary in the U.S. Later, the loans would be simultaneously repaid.