Corporate cash-pool valuation: a Monte Carlo approach

Berlinger, Edina and Bihary, Zsolt and Walter, György (2018) Corporate cash-pool valuation: a Monte Carlo approach. Studies in Economics and Finance, 35 (1). pp. 153-162. ISSN 1086-7376

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Abstract

The paper analyzes a special corporate banking product, the so called cash-pool, which gained remarkable popularity in the recent years as firms try to centralize and manage their liquidity more efficiently. The novelty of this paper is the formalization of a valuation model which can serve as a basis for a Monte Carlo simulation to assess the most important benefits of the firms arising from the pooling of their cash holdings. The literature emphasizes several benefits of cash-pooling such as interest rate savings, economy of scale and reduced cash-flow volatility. The presented model focuses on the interest rate savings complemented with a new aspect: the reduced counterparty risk toward the bank. The main conclusion of the analysis is that the value of a cash-pool is higher in case of firms with large, diverse and volatile cash-flows having less access to the capital markets especially if the partner bank is risky but offers a high interest rate spread at the same time. It is also shown that cash-pooling is not the privilege of large multinational firms anymore as the initial direct costs can be easily regained within a year even in the case of SMEs.

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