Question

Brennan Corp. has subsidiaries in four countries which have frequent transactions among themselves. The firm nets out these transactions. The current payables of each subsidiary to the other are:

                  Taiwan owes         $2m to Mexico                                       Mexico owes        $4m to Taiwan

                                                      $3m to Brazil                                                                                 $5m to Brazil

                                                      $1m to France                                                                               $1m to France

                                                     

                  Brazil owes             $3m to Taiwan                                              France owes      $2m to Taiwan

                                                      $3m to Mexico                                                                              $4m to Mexico

                                                      $2m to France                                                                               $3m to Brazil

Show how these transactions can be netted out to the minimum number of payments; i.e. who should pay who and how much. How much will be saved in transaction costs if they are 1% of the total amounts transmitted?

Answer 1

Net out Transactions

-	-	Payer
-	Details	Taiwan	Mexico	Brazil	France
Receiver	Taiwan	0	2	0	1
Mexico	0	0	0	3
Brazil	0	2	0	1
France	0	0	0	0

Transaction Costs:-

-In case of gross transactions

	Payment	Transaction cost		Payment	Transaction cost
Taiwan to			Mexico to
Mexico	2	0.02	Taiwan	4	0.04
Brazil	3	0.03	Brazil	5	0.05
France	1	0.01	France	1	0.01
Total		0.06	Total		0.10
Brazil to			France to
Taiwan	3	0.03	Taiwan	2	0.02
Mexico	3	0.03	Mexico	4	0.04
France	2	0.02	Brazil	3	0.03
Total		0.08	Total		0.09

-In case of net out transactions

	Payment	Transaction cost
Mexico to
Taiwan	2	0.02
Brazil	2	0.02
Total		0.04
France to
Taiwan	1	0.01
Mexico	3	0.03
Brazil	1	0.01
Total		0.05

Savings in transaction costs by:-

Taiwan= 0.06 - 0 = 0.06

Mexico= 0.10 - 0.04 = 0.06

Brazil= 0.08 - 0 = 0.08

France= 0.09 - 0.05 = 0.04