Shaji Sreejith 1PT10MBA46

According to Keith V. Smith, financial managers can consider a series of seven strategies for handling the excess cash balance with the firm 1. Do Nothing: Financial managers simply allows surplus liquidity to accumulate in the current account. This strategy enhances liquidity at the expenses of profits that could be earned from investing in surplus funds.
2. Make ad hoc Investments: Financial managers

makes investments in somewhat ad hoc manner. Such a strategy makes some contribution and these strategies are followed by firms who are inefficient in managing securities.

3.

Ride the Yield Curve: This strategy focus on increasing the yield from a portfolio of marketable securities by betting on interest rate changes. a) Expected Interest rate falls in near future- then managers will buy long-term securities. b)Expected interest rate will rise in near future-then managers will sell long term securities.

4.

Develop Guidelines: A firm may develop a set of guidelines which may reflect the management towards risk and return. Some guidelines are a)Do not speculate on interest rate changes b)Hold marketable securities till they mature c)Minimize transaction costs.

5. Utilize Control Limits: There are some models of cash management which assume that cash inflows and outflows occur randomly over time. These models define the upper limit and lower limit. 6. Manage with a portfolio perspective: 2 keys steps in portfolio selectiona)define the efficient frontier b)select the optimal portfolio which enables investor to achieve the highest attainable level of utility

7. Follow a mechanical procedure: Financial manager may switch funds between the cash account and marketable securities using a mechanical procedure. Success of such strategy depends on behavior of firms cash flow.

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