CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management
In the Miller-Orr model, the spread between upper and lower cash limits widens when:
The Miller-Orr spread widens when the transaction cost per conversion increases. The spread rises with transaction cost and variance of cash flows and falls as the interest rate rises, while the lower limit only shifts the band without changing its width.
- AThe variance of daily cash flows decreases
- BThe transaction cost per conversion increasesCorrect
- CThe interest rate on securities increases
- DThe lower limit is set higher
Explanation
Spread = 3 x (3/4 x transaction cost x variance / interest rate)^(1/3). It rises with higher transaction cost and variance and falls with a higher interest rate. The lower limit does not affect the spread.
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