Cash Management Models

CASH  MANAGEMENT  MODELS   

1)      Baumol’s  Model  —Baumol (1952)  Cash can be managed in the same manner as inventory  using  Economic Order Quantity  Model  (EOQ  model) .

C = √2FT

I

C = Optimal  Transaction  size

F = Fixed Cost  per transaction

T = Expected  cash  payments during  the period

I  = Interest rate  on Marketable  Securities

2)      Miller  –  Orr  Model (1966)   ( Stochastic   Model  )

Specifies  two  control  limits

Upper Control  Limit- When  cash  touches  UCL marketable securities  are  purchased.

Lower Control  Limit- When  cash  touches  LCL marketable securities  are  sold.