This lesson covers the strategies and instruments treasury uses to invest surplus cash and meet short-term funding requirements.

4.1 Managing the Optimal Cash Position
A key objective of treasury operations is to “manage optimal cash positioning through short-term investing and borrowing activities” . The goal is to minimize idle cash (which earns little or no return) while ensuring funds are available when needed.

4.2 Short-Term Investing
When an organization has surplus cash, treasury must invest it wisely. The primary considerations for short-term investments are security, liquidity, and yield. Common instruments include:

• Money Market Funds: Pooled investments in short-term, high-quality debt.

• Certificates of Deposit (CDs): Time deposits with banks that offer a fixed interest rate.

• Treasury Bills: Short-term debt issued by governments, considered among the safest investments.

• Commercial Paper: Short-term unsecured debt issued by corporations.

4.3 Short-Term Borrowing
When an organization faces a cash shortfall, treasury must arrange funding. Short-term borrowing solutions include:

• Overdrafts: A flexible, uncommitted facility allowing the company to draw beyond its account balance.

• Committed Facilities: A line of credit where the bank is legally obligated to provide funds.

• Commercial Paper: A key alternative to bank borrowing for large, creditworthy corporations.
  As with investing, treasury must “manage revolving debt agreements” and “negotiate and manage syndicated agreements” .

4.4 Hedging and Speculation
A treasury professional must also understand the difference between hedging and speculation. Hedging is the use of financial instruments to reduce or eliminate risk, while speculation is the use of these instruments to take on risk in the hope of making a profit. The treasury function should generally focus on hedging the organization’s exposures, not speculating .