Treasury Allocation Between a Fixed-Term Deposit and a Floored SARON Call Account
Clara, treasurer of a Swiss machinery exporter, holds CHF 80 million of surplus cash that will be needed for a plant expansion in four months. Her bank currently offers a three-month fixed-term deposit at 0.65% p.a. The same bank proposes a SARON-linked call deposit paying SARON plus 0.10% p.a., daily liquidity, with a 0% floor on the client rate. Over the past year SARON has averaged 0.48% but has twice fixed below zero around quarter-end, and the bank's economists expect the SNB policy rate to stay unchanged for six months. Clara's investment policy requires capital preservation, daily access is valued but not mandatory, and she may split the cash. The bank's credit risk is acceptable but not unlimited. She asks whether switching the full amount is prudent and what break-even SARON level would make the call deposit equivalent to the fixed-term deposit before credit and liquidity adjustments.
1. Calculate the break-even SARON fixing and explain how the 0% floor changes the payoff profile of the call deposit.
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The call deposit pays SARON + 0.10%. To match the fixed-term deposit's 0.65%, the break-even SARON fixing is 0.65% - 0.10% = 0.55%. Above 0.55%, the call deposit earns more; below 0.55%, it earns less. The floor matters when SARON is very negative. If SARON fixes at -0.20%, the contractual formula gives -0.10%, but the 0% floor raises the client rate to 0%. The floor therefore truncates the downside at zero rather than allowing a negative return. That option value is worth something, especially given the quarter-end negative prints. However, the floor does not protect against earning less than the fixed deposit in the wide range between -0.10% and 0.55%. Clara should compare the distribution of expected SARON fixings, not just the past average of 0.48%, which is below the 0.55% break-even.
2. Recommend an allocation and justify it using liquidity, credit exposure, and rate expectations.
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A full switch is not the obvious choice. The historical average of 0.48% is below the 0.55% break-even, so the fixed-term deposit has a yield advantage if that average persists. The call deposit's advantages are daily liquidity and the 0% floor, but the expansion is four months away and only three months are locked by the fixed deposit, leaving a one-month reinvestment gap either way. A sensible split is to place the committed portion in the three-month fixed deposit and keep a liquidity buffer in the call account. Because the bank's credit risk is acceptable but not unlimited, splitting also reduces single-counterparty concentration. If Clara strongly expects SARON to stay above 0.55%, she could increase the call allocation, but she should not rely on the past average alone. The decision should document the break-even, the floor value, and the liquidity premium she is paying for daily access.