optimizing cash balances

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OPTIMIZING CASH BALANCES REPORTED BY: ARMANDO Y. VICENCIO, JR. PROF. ADALIA BRINGAS Financial Management

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Page 1: Optimizing Cash Balances

OPTIMIZING CASH BALANCES

REPORTED BY: ARMANDO Y. VICENCIO, JR.

PROF. ADALIA BRINGAS

Financial Management

Page 2: Optimizing Cash Balances

1. EXPLAIN THE THREE (3) SEGMENTS OF MARKETABLE SECURITIES PORTFOLIO TO OPTIMIZE CASH BALANCES.

2. EXPLAIN THE VARIABLES IN MARKETABLE SECURITIES SELECTION.

3. EXPLORE COMMON MARKET INSTRUMENTS.

4. EXPLAIN HOW TO SELECT MARKETABLE SECURITIES FOR OUR PORTFOLIO SEGMENTS AS A MEANS OF PORTFOLIO MANAGEMENT.

Objectives

Page 3: Optimizing Cash Balances

Cash Balances to Maintain

The optimal level of cash should be larger of;

The transactions balances required.

The compensating balance requirements of commercial banks with which the firm has deposit accounts.

Page 4: Optimizing Cash Balances

Compensating Balances VS Fees

Compensating balance An excess balance that is left in a bank to provide

indirect compensation for loans extended or services provided.

Bank Fees Nominal fees for various services, such as

requesting a deposit slip or counter check or notarizing a document. Bank fees generally constitute a major portion of revenue for the bank, particularly for regional and local branches.

Page 5: Optimizing Cash Balances

Investment in Marketable Securities

Short-term marketable securities

Shown on the balance sheet as "short-term investments."

Page 6: Optimizing Cash Balances

The Marketable Securities Portfolio: Three Segments

Page 7: Optimizing Cash Balances

The Marketable Securities Portfolio: Three Segments

Page 8: Optimizing Cash Balances

The Marketable Securities Portfolio: Three Segments

Page 9: Optimizing Cash Balances

The Marketable Securities Portfolio: Three Segments

Page 10: Optimizing Cash Balances

Variables in Marketable Securities Selection

SafetyMarketabilityYieldMaturity

Page 11: Optimizing Cash Balances

Variables in Marketable Securities Selection

Safety No likelihood of loss in value. Safety of Principal

Marketability Liquidity Relates to the owner's ability to convert it into cash on

short notice. Yield

Return is related to the interest and/or appreciation of prin cipal

provided by the securityMaturity

Simply refers to the life of the security.

Page 12: Optimizing Cash Balances

Common Money Market Instruments

Money market instruments These instruments are generally short-

term (original maturity of less than one year)

Near-cash investments.

Page 13: Optimizing Cash Balances

Common Money Market Instruments

Treasury SecuritiesRepurchase AgreementsBankers' acceptances (BAs) Commercial PaperNegotiable Certificates of DepositEurodollarsShort-Term MunicipalsMoney Market Preferred StockMoney Market Mutual Funds

Page 14: Optimizing Cash Balances

Common Money Market Instruments

Treasury Securities Direct obligations of the government and

carry its full faith and credit. Treasury bills (T-bills) with maturities of

4,13, 26, and 52 weeks are auctioned weekly by the Treasury.

Safest and most marketable money market investments.

Pro vide the lowest yield for a given maturity

Page 15: Optimizing Cash Balances

Common Money Market Instruments

Repurchase Agreements (RPs; repos)

Is the sale of short-term securities by the dealer to the investor whereby the dealer agrees to repurchase the securities at an established higher price at a specified future time.

Page 16: Optimizing Cash Balances

Common Money Market Instruments

Bankers' acceptances (BAs) Short-term promis sory notes

Drawn on a bank by a firm to help finance foreign and domestic trade.

By "accept ing" the draft, a bank promises to pay the holder of the draft a stated amount of money at maturity.

The drawer of the draft remains secondarily liable to the holder in case the bank defaults.

Credit Investment

Page 17: Optimizing Cash Balances

Common Money Market Instruments

Commercial Paper

Consists of short-term, unsecured promissory notes issued by finance companies and certain industrial firms. General Electric Capital Corporation Ford Motor Credit Company General Motors Acceptance Corpora tion

(GMAC),

Page 18: Optimizing Cash Balances

Common Money Market Instruments

Negotiable Certificates of Deposit

A short-term investment that originated in 1961, the negotiable certificate of deposit (CD) is a large-denomination, negotiable time deposit at a commercial bank or savings institution paying a fixed or variable rate of interest for a specified time. Eurodollar CDs, Yankee CDs & Thrift

CDs

Page 19: Optimizing Cash Balances

Common Money Market Instruments

Eurodollars

Bank deposits, denominated in US dollars, not subject to US bank regulations.

Applies to any dollar deposit in foreign banks or in foreign branches of US banks.

Page 20: Optimizing Cash Balances

Common Money Market Instruments

Short-Term Municipals

Local Governments

One is a commercial paper type of instrument, where the interest rate is reset every week.

Maturity is usually kept within one or two years.

Page 21: Optimizing Cash Balances

Common Money Market Instruments

Money Market Preferred Stock

A class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.

The precise details as to the structure of preferred stock is specific to each corporation. However, the best way to think of preferred stock is as a financial instrument that has characteristics of both debt (fixed dividends) and equity (potential appreciation). Also known as "preferred shares".

Page 22: Optimizing Cash Balances

Common Money Market Instruments

Mutual Funds Fund operated by an investment company

which raises money from shareholders and invests in a group of assets

Mutual funds raise money by selling shares of the fund to the public, much like any other type of company can sell stock in itself to the public.

Page 23: Optimizing Cash Balances

Common Money Market Instruments

Mutual Funds Mutual funds then take the money they receive

from the sale of their shares (along with any money made from previous investments) and use it to purchase various investment vehicles, such as stocks, bonds and money market instruments. In return for the money they give to the fund when purchasing shares, shareholders receive an equity position in the fund and, in effect, in each of its underlying securities. For most mutual funds, shareholders are free to sell their shares at any time.

Page 24: Optimizing Cash Balances

Selecting Securities for the Portfolio Segments

Page 25: Optimizing Cash Balances

Selecting Securities for the Portfolio Segments

Ready cash segment (R$)

Major Considerations Safety and Marketability Maturity: Short-term

Money Market Securities Treasury Bills Short-term, high-quality repurchase agreements Short-term Municipals

Page 26: Optimizing Cash Balances

Selecting Securities for the Portfolio Segments

Cash segment (C$) Major Considerations

Yield Safety and Marketability

Money Market Securities Federal Agency Issues Certificate of Deposits (Timed Deposits) Commercial Paper Repurchase Agreements Bankers’ Acceptances Eurodollar Deposits Mutual Funds

Page 27: Optimizing Cash Balances

Selecting Securities for the Portfolio Segments

Free cash segment (F$)

Major Considerations Yield Maturity: Long-term

Money Market Securities Certificate of Deposits (Timed Deposits) Stocks Mutual Funds

Page 28: Optimizing Cash Balances

Thank You…