Miller
Orr Formula
Miller or formula calculates the spread for cash
fluctuation. There is no control action required when the cash is floating
between these limits.
Spread
= 3 x [(3/4 x T x Vc)/interest] 1/3
T=
Transaction cost
V
cash = Variance of cash
Interest
= Interest is per day
Miller
Orr Formula Example
|
Minimum
level of cash
|
$ 75,000
|
|
Transaction
Cost
|
$ 150
|
|
Variance
|
$ 230,000
|
|
Interest
rate
|
$ .7 %
|
|
|
|
Solution
=
3 x [(¾ x 150 x 230,000)/.0007]1/3
=
3 x (3.69)1/3
=3
x 3328
=
$ 9984
It is important to remember that limits are
not to be used in the formula and one of the limits either lower or upper is
given and we will calculate the spread and apply that spread to calculate
second limit.
