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Risk-based cash demand in a firm

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  • Michalski, Grzegorz

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.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 4541.

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Date of creation: 15 Aug 2006
Date of revision: 06 Sep 2006
Handle: RePEc:pra:mprapa:4541

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Related research

Keywords: Demand for Cash; Cash balances; Risk; Uncertainty; Real Options; Option Value of Money; Short-Term Financial Management; Working Capital Management;

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  1. Beck, Stacie & Stockman, David R., 2005. "Money as real options in a cash-in-advance economy," Economics Letters, Elsevier, Elsevier, vol. 87(3), pages 337-345, June.
  2. Ingersoll, Jonathan E, Jr & Ross, Stephen A, 1992. "Waiting to Invest: Investment and Uncertainty," The Journal of Business, University of Chicago Press, vol. 65(1), pages 1-29, January.
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