OPTIMIZATION MODELS FOR SHORT TERM INVESTMENTS-1

In addition, cash managers are responsible for keeping the firm in a liquid position. If an unexpected need for cash should arise, the cash manager may need to investments before maturity. Thus, an important criterion for a short-term investment strategy is instrument’s marketability.

 

Firms take a variety of approaches to investment policies. Some firms give the cash manager a loose reign on short-term investment decision. Others carefully spell out what types on investments can be made at certain maturities and at what risk. Policies often relate how a firm’s top management views the role of short-term investments. Is short-term investing seen as liquidity management or portfolio management? A company that takes a liquidity management approach to its short-term investments focuses on the recording, control, and prediction of daily receipts and disbursements. Any excess cash is places in very short period (may be even overnight) investments.

 

On the other hand, a company with a true portfolio management approach to investing considers the explicit income to be gained from sophisticated strategies. To some, sophisticated means having a model-based decision support system. At either end of the spectrum, investment guidelines define the cash manager’s investment task. Typically, guidelines are formulated based on the firm’s definition of allowable risk, given sensitively to investment-instrument’s safety, marketability and yield.