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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.
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
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)
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