Miller
Orr Formula Example
|
Minimum
level of cash
|
$ 80,000
|
|
Transaction
Cost for investment
|
$ 90
|
|
Variance
of Cash
|
$ 150,000
|
|
Interest
rate
|
$ .4 %
|
|
|
|
Solution
Spread
= 3 x [(3/4 x T x Vc)/interest] 1/3
T=
Transaction cost
V
cash = Varian of cash
Interest
= Interest is per day
=
3 x [(¾ x 90 x 150,000)/.0004]1/3
=3
x 2934
= $ 8,801
Important Tips
1. Interest rate in the
formula is daily interest rate normally a very low figure
2. Co variance is
square root of Standard deviation (SD2= Co Variance)
