Optimal Portfolio of Foreign Currencies with Borrowing and Lending

UNTIL THE LATE SIXTIES, most American corporations held their liquid assets in the form of cash, short-term government notes, and other highly liquid marketable securities. Since the early seventies, more and more firms have begun to hold their current assets in foreign currencies beyond what would be required to conduct normal foreign operations. In the last few years companies have accumulated and retained much more cash than they held in the past. In order to understand the magnitude of this issue, realize that at the end of 1977, cash and short-term securities held by International Business Machines amounted to $5.4 billion; by Exxon, $4.2 billion; and Ford and General Motors held well above $3 billion. Obviously, with this cash pile up, most companies devote much attention to cash management. Even a slight improvement in the management of these assets means a substantial profit, and firms have responded with highly trained staff, in particular, people familiar with the international money market and the investment opportunities available. The change in attitude toward cash management may be summarized by the following quotation from a senior adviser to the J. Henry Schroder Bank and Trust Company: "Companies are no longer looking at a bank balance, they're looking at a