Short-term Investment of Cash Balances

Abstract

At the end of March 1989, the Treasurer of Alvor Developments is faced with a problem concerning the investment of surplus cash. He has £50 000 in hand, most or all of which will be required to meet payments arising from a build-up in inventories over the next 4 months. These payments are made at the month-ends, but it is not possible for the Treasurer to forecast exactly the size of the payment that will be required at the end of any given month. The most that he can do toward such a forecast is to draw up a probability tree specifying twelve possible sequences of cash payments over the next 4 months, and to associate probabilities with each sequence. This probability tree is given below (Figure 14.1); on it March is referred to as month 0, April as month 1, and so on. Each sequence of payments is labelled with a number.