As per the miller and orr model of cash management

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As per the Miller and Orr model of cash management the companies let their cash balance move within two limits a) Upper Control limit b) Lower Control Limit
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M. H. Miller and Daniel Orr’s Stochastic Model Miller – Orr Cash Management Model Upper Control Limit : Buy Security Curve representing Cash Balance Purchase Market Security Sale of market security Return Point Lower Control Limit : Buy Security Cash h Z O
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M. H. Miller and Daniel Orr’s Stochastic Model Explanation For the Diagram Along with a return point when the cash balance touches the upper Control limit (h), the marketable security is purchased to the extend till it reaches normal cash balance (Z) In the same manner when the cash balance touches lower limit (o), the firm Will Sell the Marketable security to the extent till it reaches normal cash Balance (Z)
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M. H. Miller and Daniel Orr’s Stochastic Model Computation of Miller – Orr Model of Cash Management Spread (Z)= ( 3/4 * Transaction cost *Variance of Cash Flow ) Return Point = Lower limit + Spread (Z) Variance of Cash Flow = (Standard Deviation) or ( ) 1/3 Interest Rate 3 2 2
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M. H. Miller and Daniel Orr’s Stochastic
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