Corporate cash-pool valuation in a multi-firm context: a closed formula

Berlinger, Edina and Bihary, Zsolt and Walter, György (2016) Corporate cash-pool valuation in a multi-firm context: a closed formula. Working Paper. Corvinus University of Budapest Faculty of Economics.

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Following our earlier paper on the subject, we present a general closed formula to value the interest savings due to a multi-firm cash-pool system. Assuming normal distribution of the accounts the total savings can be expressed as the product of three independent factors representing the interest spread, the number and the correlation of the firms, and the time-dependent distribution of the cash accounts. We derive analytic results for two special processes one characterizing the initial build-up period and the other describing the mature period. The value gained in the stationary system can be thought of as the interest, paid at the net interest spread rate on the standard deviation of the account. We show that pooling has substantial value already in the transient period. In order to increase the practical relevance of our analysis we discuss possible extensions of our model and we show how real option pricing technics can be applied here.

Item Type:Monograph (Working Paper)
Series Name:Corvinus Economics Working Papers - CEWP
Series Number / Identification Number:2016/06
Uncontrolled Keywords:cash management, analytical solution, Brown motion, mean reversion, real option pricing
JEL classification:G15 - International Financial Markets
G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
G32 - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
ID Code:2208
Deposited By: Ádám Hoffmann
Deposited On:28 Jan 2016 15:10
Last Modified:28 Jan 2016 15:10

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