Corporate cash-pool valuation: a Monte Carlo approach

This paper aims to analyze 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.

A Monte Carlo simulation has been applied to assess the key benefits of the firms arising from the pooling of their cash holdings.

The main conclusion of the analysis is that the value of a cash-pool is higher in the 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 as the initial direct costs can be easily regained within a year even in the case of SMEs.

The novelty of this paper is the formalization of a valuation model. 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.