Control of Cash Reserves

Abstract

The following paper deals with a special type of inventory control problem in which the commodity to be controlled is cash. An insurance company holds a reserve of cash, part of which is invested in short-term loans, the balance being held on current account in a bank. The company draws on the balance to meet the requirements of the company's stockbrokers, who invest money on its behalf, and to meet claims and expenses. If these drawings are large, an overdraft may result. Thus, as distinct from standard inventory problems, in this problem storage and penalty costs are well defined. The paper has two main features. Firstly, an approximate solution is found using characteristics of the optimal solution determined by dynamic programming. Secondly, an algorithm for long-duration processes of this type is derived.

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