### Abstract

This paper provides an analytical solution to a cash management problem when cash income and demand are described by Compound Poisson processes. The paper generalizes past results in the cash management literature to arbitrary income and demand distribution functions. Further, our results can be applied as well in the area of banking. Throughout the paper we restrict attention to the family of control barrier policies. These consist in hedging cash up to a critical level and investing all incoming cash exceeding this level. We employ a long-run average cost criterion to determine an optimal control barrier. A diffusion approximation of the cash level process (income less demand) is used to obtain a simpler expression for the average cost and to yield a closed form solution to the optimal control barrier. For demonstration purposes, an example is resolved.

Original language | English (US) |
---|---|

Pages (from-to) | 345-352 |

Number of pages | 8 |

Journal | Journal of Banking and Finance |

Volume | 4 |

Issue number | 4 |

DOIs | |

State | Published - 1980 |

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### ASJC Scopus subject areas

- Economics and Econometrics
- Finance

### Cite this

*Journal of Banking and Finance*,

*4*(4), 345-352. https://doi.org/10.1016/0378-4266(80)90013-8

**A note on the optimal control of a cash balance problem.** / Tapiero, Charles; Zuckerman, Dror.

Research output: Contribution to journal › Article

*Journal of Banking and Finance*, vol. 4, no. 4, pp. 345-352. https://doi.org/10.1016/0378-4266(80)90013-8

}

TY - JOUR

T1 - A note on the optimal control of a cash balance problem

AU - Tapiero, Charles

AU - Zuckerman, Dror

PY - 1980

Y1 - 1980

N2 - This paper provides an analytical solution to a cash management problem when cash income and demand are described by Compound Poisson processes. The paper generalizes past results in the cash management literature to arbitrary income and demand distribution functions. Further, our results can be applied as well in the area of banking. Throughout the paper we restrict attention to the family of control barrier policies. These consist in hedging cash up to a critical level and investing all incoming cash exceeding this level. We employ a long-run average cost criterion to determine an optimal control barrier. A diffusion approximation of the cash level process (income less demand) is used to obtain a simpler expression for the average cost and to yield a closed form solution to the optimal control barrier. For demonstration purposes, an example is resolved.

AB - This paper provides an analytical solution to a cash management problem when cash income and demand are described by Compound Poisson processes. The paper generalizes past results in the cash management literature to arbitrary income and demand distribution functions. Further, our results can be applied as well in the area of banking. Throughout the paper we restrict attention to the family of control barrier policies. These consist in hedging cash up to a critical level and investing all incoming cash exceeding this level. We employ a long-run average cost criterion to determine an optimal control barrier. A diffusion approximation of the cash level process (income less demand) is used to obtain a simpler expression for the average cost and to yield a closed form solution to the optimal control barrier. For demonstration purposes, an example is resolved.

UR - http://www.scopus.com/inward/record.url?scp=49149144703&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=49149144703&partnerID=8YFLogxK

U2 - 10.1016/0378-4266(80)90013-8

DO - 10.1016/0378-4266(80)90013-8

M3 - Article

VL - 4

SP - 345

EP - 352

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

SN - 0378-4266

IS - 4

ER -