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

Edina Berlinger (), Zsolt Bihary () and Gyorgy Walter

Corvinus Economics Working Papers (CEWP) from Corvinus University of Budapest

Abstract: 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.

Keywords: cash management; analytical solution; Brown motion; mean reversion; real option pricing (search for similar items in EconPapers)
JEL-codes: G15 G21 G32 (search for similar items in EconPapers)
Date: 2016-01-20
New Economics Papers: this item is included in nep-cfn
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http://unipub.lib.uni-corvinus.hu/2208/ original version (application/pdf)

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Journal Article: Corporate cash-pool valuation in a multi-firm context: A closed formula (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:cvh:coecwp:2016/06

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