Optimal Cash Position

Stanley Myint and Fabrice Famery

Contents

Foreword

Introduction

1.

Theory and Practice of Corporate Risk Management

2.

Theory and Practice of Optimal Capital Structure

3.

Introduction to Funding and Capital Structure

4.

How to Obtain a Credit Rating

5.

Refinancing Risk and Optimal Debt Maturity

6.

Optimal Cash Position

7.

Optimal Leverage

8.

Introduction to Interest Rate and Inflation Risks

9.

How to Develop an Interest Rate Risk Management Policy

10.

How to Improve Your Fixed-Floating Mix and Duration

11.

Interest Rates: The Most Efficient Hedging Product

12.

Do You Need Inflation-linked Debt?

13.

Prehedging Interest Rate Risk

14.

Pension Fund Asset and Liability Management

15.

Introduction to Currency Risk

16.

How to Develop Currency Risk Management Policy

17.

Translation or Transaction: Netting Currency Risks

18.

Early Warning Signals

19.

How to Hedge High Carry Currencies

20.

Currency Risk on Covenants

21.

Optimal Currency Composition of Debt 1: Protect Book Value

22.

Optimal Currency Composition of Debt 2: Protect Leverage

23.

Cyclicality of Currencies and Use of Options to Manage Credit Utilisation

24.

Managing the Depegging Risk

25.

Currency Risk in Luxury Goods

26.

Introduction to Credit Risk

27.

Counterparty Risk Methodology

28.

Counterparty Risk Protection

29.

Optimal Deposit Composition

30.

Prehedging Credit Risk

31.

xVA Optimisation

32.

Introduction to M&A-related Risks

33.

Risk Management for M&A

34.

Deal-contingent Hedging

35.

Introduction to Commodity Risk

36.

Managing Commodity-linked Revenues and Currency Risk

37.

Managing Commodity-linked Costs and Currency Risk

38.

Commodity Input and Resulting Currency Risk

39.

Offsetting Carbon Emissions

40.

Introduction to Equity Risk

41.

Hedging Dilution Risk

42.

Hedging Deferred Compensation

43.

Stake-building

Wouldn’t it be great if a company could determine exactly how much cash it needs? It would only have to look at its current and past financial statements, evaluate future growth plans, investments and outgoings, estimate the volatility of cashflows and, based on this, decide how much cash it needs to be comfortable. Unfortunately, the future is uncertain, and forecasts are not perfectly accurate. Any estimate of future cash needs is subject to assumptions, and therefore the optimal cash position can at best be a guess. Still, an educated guess is better than nothing! In this chapter, we review a methodology that allows companies to estimate their optimal cash position to the best extent possible.

Let us start by giving an overview of the historical development of cash positions among European companies since the credit crisis.

ONCE BITTEN, TWICE SHY

Prior to 2008, many companies had a fairly aggressive debt structure, with a significant amount of refinancing risk (for more detail, see Chapter 5). This is schematically shown in Figure 6.1.

The blue lines in Figure 6.1 all start from the current value of liquidity (cash plus undrawn credit facilities). Future cashflows are

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