OPTIMAL CASH MANAGEMENT UNDER CONDITIONS OF UNCERTAINTY

The cash management problem considered here is the management of a liquid assets portfolio, composed of cash and marketable securities. The policies of US corporations towards investing surplus cash as reported in published surveys are summarised and models for the management of cash and marketable securities as proposed in the literature are outlined. The optimal solution is then presented for a particular cash management problem, first introduced by Mao and Sarndal. The problem is how to manage a portfolio of cash and marketable securities in order to service a given debt schedule, where the amounts are known but the timing of the payments is uncertain.     

ON THE CORRESPONDENCE BETWEEN THE BAUMOL-TOBIN AND MILLER-ORR OPTIMAL CASH BALANCE MODELS

In this note, the author identifies a correspondence relationship between the Baumol-Tobin (BT) and Miller-Orr (MO) optimal cash balance frameworks and specifies the conditions under which both models imply the same level of optimal cash balances. Realistic applications of these models will concern net cash flows that exhibit behavior somewhere between the two extremes of BT entirely deterministic and MO completely random. The author demonstrates that if the correspondence relationship is satisfied, either the BT or the MO cash balance model can be employed since both models imply the same result. One conjecture open for empirical verification is that cash balance models perform more (less) adequately for groups of firms that satisfy (violate) the correspondence relationship.