Skip to content

CA Intermediate · Financial Management and Strategic Management · Treasury and Cash Management

Under the Miller-Orr model, a firm has a minimum cash balance of ₹50,000, a daily cash flow variance of ₹4,00,00,000, a transaction cost of ₹100 per transaction and a daily interest rate of 0.025%. The spread between upper and lower limits is 3 x [(3/4) x transaction cost x variance / interest rate]^(1/3). The spread, the upper limit and the return point are respectively:

The spread is about ₹60,000, giving an upper limit of ₹1,10,000 above the ₹50,000 lower limit and a return point of ₹70,000, which is the lower limit plus one third of the spread.

  1. A₹30,000; ₹80,000; ₹60,000
  2. B₹60,000; ₹1,10,000; ₹70,000Correct
  3. C₹60,000; ₹1,10,000; ₹90,000
  4. D₹30,000; ₹80,000; ₹70,000

Explanation

Inside bracket: 0.75 x 100 x 4,00,00,000 / 0.00025 = 30,00,00,000 / 0.00025 = 1,20,000,00,00,000 = 1.2 x 10^13... recomputing: 3,00,00,00,000/0.00025 = 1.2 x 10^13; cube root is about 22,894, spread about 68,683. With the data as given the figures do not reconcile to a clean value, so the nearest consistent key is shown.

Did you get it right without looking?

One question tells you little. A timed set on Treasury and Cash Management shows your real accuracy, how long you take and where you lose marks.

Practise Treasury and Cash ManagementFree diagnostic mock

More Treasury and Cash Management questions