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CMA Intermediate · Financial Management and Business Data Analytics · Management of Cash and Cash Equivalents

In the Miller-Orr model, which change would widen the spread between the upper and lower control limits, other things equal?

A higher variance of daily net cash flows widens the Miller-Orr spread, because spread rises with variance and transaction cost and falls with the interest rate. The lower limit only shifts the band, so changing it leaves the spread unchanged.

  1. AA higher variance of daily net cash flowsCorrect
  2. BA higher daily interest rate on securities
  3. CA lower transaction cost per transfer
  4. DA higher lower limit set by management

Explanation

Spread = 3 x (3Tσ²/4i)^(1/3). It rises with transaction cost T and variance σ², and falls with interest rate i. The lower limit only shifts the band and does not change the spread. So higher variance widens it, while a higher rate or lower cost narrows it.

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