1. Suppose the nominal interest rate is 3 percent, the cost of
going to the ATM is $1.50, you have a 12 percent probability of
having your cash lost or stolen, and you spend $5 each day.
a. What is your total cost of holding cash as a function of the number of days between trips to the ATM?
b. How often will you go to the ATM to minimize your costs?
Let the number of Times an ATM is visited be T
Cost of going to ATM =(365*1.50)/T
Opportunity Cost = (5*0.03*T)/2
Expected Cost of Loss = (5*T*0.12)/2
a.Total Cost = (365*1.50)/T+(5*0.03*T)/2+(5*T*0.12)/2
Using the minimisation function we get
b. 38 days
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