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ACCA Strategic Professional · Advanced Financial Management · The role of the treasury function in multinationals

A multinational's treasury centre operates multilateral netting for four subsidiaries. Over the period, the gross intra-group payables total $18 million, and after netting the net settlements required total $5 million. By how much does netting reduce the volume of cross-border currency transactions that must be settled, and what is the main treasury benefit?

Netting cuts settlements from $18 million to $5 million, a $13 million reduction. The benefit is lower transaction costs, spreads and float on fewer currency conversions. It does not remove economic exposure, which depends on underlying competitiveness and not on settlement method.

  1. A$13 million reduction, lowering transaction costs, spreads and floatCorrect
  2. B$5 million reduction, because only the net amount is saved
  3. C$23 million reduction, because gross and net amounts are added together
  4. D$13 million reduction, which eliminates all economic exposure of the group

Explanation

Gross flows of $18m are reduced to $5m net, so settlements fall by $13m. This lowers bank charges, FX dealing spreads and float. Netting does not remove economic exposure, so the final option is wrong; it only reduces transaction and settlement exposure.

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