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Session 2 Slides - Printout - Netver
Session 2 Slides - Printout - Netver
Session 2 Slides - Printout - Netver
Opportunity
Costs
The investment income
foregone when holding cash.
Trading costs
C* Size of cash balance
BAT model
The optimal cash balance is found where the
opportunity costs equals the trading costs
Given
T = The total amount of cash needed for the whole
period
F = The fixed cost of raising cash (e.g. selling
securities)
R = The opportunity cost of holding cash (i.e. the
interest rate)
BAT model
Opportunity
Costs
Trading costs
U*
C*
Ordering
Costs
costs Total costs
Holding
costs