International Financial Management 2nd Edition by Geert Bekaert ,Robert Hodrick

Exercise 2

Euroshipping Corporation maintains separate production and distribution facilities in Sweden, France, Spain, and Italy. The corporate headquarters is in France. As a consultant to the treasurer of Euroshipping, you have been asked to estimate how much money the firm could save by creating a centralized cash management pool. Currently, each affiliate maintains precautionary cash balances equal to three standard deviations above its expected demand for cash.
By how much could Euroshipping reduce its overall demand for cash if it were to create a centralized cash pool for the four affiliates (Assume that the cash needs are normally distributed and are independent of each other.)