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

Under the Miller-Orr model, which statement is correct?

The spread between the upper and lower control limits widens when the variance of daily cash flows rises. The Miller-Orr spread formula contains variance under a cube root, so more uncertain cash flows require a wider band before cash is adjusted.

  1. AThe spread between upper and lower control limits widens when the variance of daily cash flows increasesCorrect
  2. BThe return point is always set at the upper control limit
  3. CCash is adjusted whenever the balance moves away from the return point by any amount
  4. DThe model assumes cash flows are perfectly predictable each day

Explanation

In Miller-Orr, spread = 3 x (3/4 x transaction cost x variance / interest rate)^(1/3). Spread rises with variance, so greater uncertainty widens the control band. The return point lies one-third of the spread above the lower limit, not at the upper limit. Action is taken only when a limit is touched, and the model is designed for random flows.

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