Question: The ABC Ltd. has experienced a stochastic demand for its product. With the result that cash balances fluctuate randomly. The standard deviation of daily net

The ABC Ltd. has experienced a stochastic demand for its product. With the result that cash balances fluctuate randomly. The standard deviation of daily net cash flows is Rs 1,000, The company wants to impose upper and lower bound control limits for conversion of cash into marketable securities and vice-versa. The current interest rate on marketable securities is 6% p.a. The fixed cost associated with each transfer is Rs 1.000 and minimum cash balance to be maintained is Rs 10.000. Calculate:

a) The cash balance as per Miller-Orr model.

b) The upper limit.

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