Miller Orr model — OpenTuition Forums

CCarly8y ago

Hi, I am having trouble calculating the spread for the miller orr model. I know the formula, but I seem to be entering it into the calculator incorrectly and this results in an incorrect answer. Please can you break down the best way to enter this formula into a calculator. Example of how I am doing the calculation, I assume it is ok to turn the fraction of 3/4 and 1/3 into the number equivalent of 0.75 and 0.33? Variance is 270,000 Transaction cost is 30 Daily interest rate is 0.025% 3 x (0.75 x 30 x 270000 / 0.00025) to the power of 0.33 Answer is 8,689 Yet I always get: 8,023.63 Thanks.

CChris8y ago#1

I just tried that on my calculator and got 8,689. Are you doing things in the wrong order perhaps? Remember BIDMAS for the order of doing calculations - Brackets, Indices, Division/Multiplication, Addition/Subtraction So calculate the value of the bracket first, you get 24,300,000,000 Then do the indices - 24,300,000,000 to the power of 0.3333333 = 2,896.47 Then do the multiplication - 2,896.47 x 3 = 8,689.40

John MoffatTutor8y ago#2

The reason is due to rounding. 1/3 actually equals 0.33333333 You have two choices (depending on your calculator). Either use brackets when you come to the power, and enter it (in brackets) as 1/3. Alternatively do as you have been doing, but put a lot more 3's :-) (It might sound a tiny difference, but given the size of the other numbers this is what is making the difference in your answer)

CCarly8y ago#3

Hi, Thanks both for your responses! Much appreciated. Carly

John MoffatTutor8y ago#4

You are welcome :-)

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