The Handbook of Corporate Financial Risk Management (2nd Edition)
First published:
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Optimal Cash Position
Optimal Cash Position
Foreword
Introduction
Theory and Practice of Corporate Risk Management
Theory and Practice of Optimal Capital Structure
Introduction to Funding and Capital Structure
How to Obtain a Credit Rating
Refinancing Risk and Optimal Debt Maturity
Optimal Cash Position
Optimal Leverage
Introduction to Interest Rate and Inflation Risks
How to Develop an Interest Rate Risk Management Policy
How to Improve Your Fixed-Floating Mix and Duration
Interest Rates: The Most Efficient Hedging Product
Do You Need Inflation-linked Debt?
Prehedging Interest Rate Risk
Pension Fund Asset and Liability Management
Introduction to Currency Risk
How to Develop Currency Risk Management Policy
Translation or Transaction: Netting Currency Risks
Early Warning Signals
How to Hedge High Carry Currencies
Currency Risk on Covenants
Optimal Currency Composition of Debt 1: Protect Book Value
Optimal Currency Composition of Debt 2: Protect Leverage
Cyclicality of Currencies and Use of Options to Manage Credit Utilisation
Managing the Depegging Risk
Currency Risk in Luxury Goods
Introduction to Credit Risk
Counterparty Risk Methodology
Counterparty Risk Protection
Optimal Deposit Composition
Prehedging Credit Risk
xVA Optimisation
Introduction to M&A-related Risks
Risk Management for M&A
Deal-contingent Hedging
Introduction to Commodity Risk
Managing Commodity-linked Revenues and Currency Risk
Managing Commodity-linked Costs and Currency Risk
Commodity Input and Resulting Currency Risk
Offsetting Carbon Emissions
Introduction to Equity Risk
Hedging Dilution Risk
Hedging Deferred Compensation
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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