The Handbook of Corporate Financial Risk Management (2nd Edition)
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Optimal Deposit Composition
Optimal Deposit Composition
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
In this chapter, we turn our attention to the issue of counterparty risk on bank deposits. Most cash deposits cannot achieve a return that is in excess of the companies’ funding cost.11 As mentioned in Chapter 6, this does not mean that having cash is “value destroying” since higher liquidity improves the creditworthiness of the company, and therefore implicitly reduces the funding cost. Each company should determine its optimal liquidity requirement as that amount of cash beyond which the marginal cost outweighs the benefit. For more details on the economics of cash management, see Brealey, Myers and Allen (2010) and references therein. Therefore, many companies consider cash (and undrawn credit facilities) as a liquidity buffer in case capital markets funding becomes difficult and at the same time the company finds it difficult to generate cash through operations. Cash is therefore normally kept on short-term deposits only, with maturities ranging from overnight to a maximum of 12 months.
The company described in this chapter is looking for a systematic way to split cash deposits between its various banking counterparties so that its counterparty risk is optimised.
BACKGRO
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