Advanced mathematical model facilitates complex cash management

Prof. David Perry and Prof. Shaul Bar-Lev of HIT's Faculty of Industrial Engineering & Technology Management, recently received a substantial 3-year grant from the Israel Science Foundation (ISF) to develop an innovative mathematical model for cash management. 

The model facilitates the operations of cash controllers, such as banks, insurance companies, and spot markets, and relates to cash as inventory.  It is based on queuing theory – the mathematical study of waiting lines.  The new funding follows a previous ISF grant, utilized by Prof. Perry and Prof. Bar-Lev to develop a mathematical model for the effective management of blood banks, where Prof. Perry served as a logistics advisor.  

The researchers explain: "Our new model specifically addresses the issue of brokerage fees, and how they should be calculated for optimal outcomes. A bank, for example, charges a certain percentage of every transaction for the service it provides – a place to deposit our money and keep it safe. The new model, with its convenient tables and equations, can help the bank's decision-makers aim for a certain annual income by manipulating the brokerage fees (or interest rates) collected from customers."

According to Prof. Perry and Prof. Bar-Lev, insurance companies can also benefit from the novel solution. It is of particular relevance in the practice of reinsurance, in which the insurance company insures itself, and needs to calculate optimal risk distribution.

"Spot markets are another target audience," they say. "In a spot market a specific product – such as oil, metal, or grain - is brought in randomly by suppliers and aggregated in one spot, which provides storage services and facilities and offers the commodity to customers. In effect the spot market acts as a bank for its particular product (which represents a certain amount of money), charging brokerage fees for its services. 

Ultimately, our original model can be very helpful to managers conducting these complex financial activities."

Posted: 19/08/2021