Problem:
Martin Company uses Miller-Orr model to manage its cash, using a money-market fund and a checking account. Martin keeps a minimum balance of $5000 in the checking account. The checking account pays no interest, but the money market pays 5% interest per annum. Martin has found the standard deviation of the cash flows to be $5120 per week. The cost of transferring the funds between the accounts is $125 per transfer. Assume that a year has 52 weeks.
Required:
Find the following:
- The average checking account balance.
- The interest forgone in a year.
Note: Please explain comprehensively and give step by step solution.