Question 2(Miller-Orr model of cash management) Alpha Ltd standard deviation () of the daily cash balance during the last year was $500, and the transaction cost was $5. The company also has the opportunity to invest idle cash in marketable securities at an annual interest rate of 10%.

Required i.) Determine the daily opportunity cost (interest rate) and the variance of daily cash flow [2 marks]

ii.) Calculate the targeted cash balance for the firm [4 marks]

iii.) The upper limit of cash balance and the average cash balance. [3 marks]

iv.) State the amount of short-term securities to be purchase or sold once the upper limit or lower limit is reach. [2 marks]

v) How would you evaluate this approach to cash management? [4 marks]