Evaluating the interest aspect of cash management

An important aspect of cash management is how to deal with temporary liquidity positions. Clearly a treasurer wants to maximise interest gain in case of a liquidity surplus and to minimise interest cost whenever there is a shortage of liquidity. This is done by means of transactions in the money market, deposits and loans. A model is presented that yields a strategy which optimises the interest cost for a certain period in the past, taking into account the dynamic character of interest expectations.