Risk-based cash demand in a firm

Grzegorz Michalski

MPRA Paper from University Library of Munich, Germany

Abstract: Firms hold cash for a variety of different reasons. Generally, cash balances held in a firm can be called considered, precautionary, speculative, transactional and intentional. The first are the result of management anxieties. Managers fear the negative part of the risk and hold cash to hedge against it. Second, cash balances are held to use chances that are created by the positive part of the risk equation. Next, cash balances are the result of the operating needs of the firm. In this article, we analyze the relation between these types of cash balances and risk. This article also contains propositions for marking levels of precautionary cash balances and speculative cash balances. Current models for determining cash management, assign no minimal cash level, or their minimal cash level is based on the manager's intuition. Presented in this article model avoid intuition and is based on calculation. Application of this proposition should help managers to make better decisions to maximize the value of a firm.

Keywords: Demand for Cash; Cash balances; Risk; Uncertainty; Real Options; Option Value of Money; Short-Term Financial Management; Working Capital Management (search for similar items in EconPapers)
JEL-codes: G32 G39 (search for similar items in EconPapers)
Date: 2006-08-15, Revised 2006-09-06
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Published in MANAGING AND MODELING OF FINANCIAL RISK 2006 (2006): pp. 179-185

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