Hi John.
Please could you help me with the foll. statement:
'If the balances held in a current account are kept as low as possible by frequent movements of cash in and out, in order to minimise the holding costs, this may lead to excessive transaction costs'
I understand the need to maintain a low level of liquidity is to minimise the opportunity cost in holding cash, but what about the transaction costs? Also, the relationship between cost of holding cash and size of cash balance is inverted (like 1/x). Why is it that more cash means less transaction cost?
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Baumol model
10y ago#1If you have higher balances in the current account then you need to sell investments less often and will therefore have lower transaction costs over the year.
Conversely, if you keep low balances in the current account then you need to sell investments more often which means more transaction costs over the year (which is what the statement is saying).
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