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The directors of company N have set a minimum cash balance of $61,765. The average cost of banking transactions is $25 per transaction and the standard deviation of its cash flows was $3,000 per day. The average interest earned on investments is 6%. Using the Miller-Orr model what should be the upper limit of cash held?
answer is 66000
The upper limit is the lower limit (61765) plus the spread.
To get the spread, you use the formula on the formula sheet.
The variance is the (standard deviation)^2
You also need the interest to be the interest per day, which is 0.06/365 = 0.000164384
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Spread = 3*[[3/4 * 25 * (3000)^2]/.000164]^(1/3) = £30,287
Upper limit = £ 61765 + £ 30287 = £ 92052.
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