OPTIMIZING THE PROFIT OF HAMPSHIRE & KENT BANK
Student Number – 30612322
Module Code – MANG6122
Word Count - 1552
TRANSMITTAL LETTER
SHIELD CONSULTANTS
Above Bar street
Southampton, UK
21st November 2018
Mr. Anthony Edward Stark
Bank Manager
The Hampshire & Kent Bank
Southampton
Dear Mr. Stark
As requested, this report gives a clear understanding about the transfer limit at which the amount accrued in the Hampshire & Kent bank to be transferred to the Central Reserve Bank in order to maximize the Hampshire & Kent Bank’s income. It also has the information about the model I used, the comparisons that I have made at different transfer limits to enhance the profit of the Hampshire & Kent bank. Also, I have attached the graphs that I got from the results to give you a better picture about how the average profit varies at different transfer limits.
I hope you find this report satisfactory.
Sincerely yours,
Nick Fury
REPORT ON HOW TO OPTIMIZE PROFIT OF HAMPSIRE & KENT BANK
Presented to
Mr. Anthony Edward Stark
Managing Director
The Hampshire & Kent Bank
Southampton, UK
Presented by
Nick Fury
Shield Consultants
Above Bar street
Southampton, UK
21st November 2018
EXECUTIVE SUMMARY:
This report gives you a clear idea about what I have done in the model and what assumptions I have made to make the best use of fixing the transfer limit. So that the Hampshire & Kent bank’s profit can be maximized. As there is an uncertain variable such as the daily deposit cash flow is involved, I have used @risk software to create the model representing real life scenarios to test it and concluded my transfer limit to £800,000. While running the model for several iterations I have assumed that the cost of transfer incurred on the deposit need to be subtracted before transferring it to the Central Reserve bank and I have assumed that the rest of the variables to remain constant throughout the period. The whole process is done for a period of 365 days so that we can get a brief understanding about what happens every day. After, successfully running the model I can assure 95% that by transferring the accrued amount in Hampshire & Kent Bank to the Central Reserve Bank at a transfer limit £800,000 an average profit of £257,909 can be made.
Table of Contents
Sl. No
Title
Page Number
1
Introduction - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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2
Description of the Model - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
5
3
Assumptions - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
5
4
Criteria for evaluation - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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5
Findings - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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6
Comparison - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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7
Limitations - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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8
Conclusion - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
7
INTRODUCTION:
As we all are aware that bank is a financial institution which accepts deposit from the public and creates credit. The financial stability of a country relies upon the Bank’s Income. Bank’s stability reflects upon the amount of money being deposited and transferred to the Central Reserve Bank. In order to overcome the uncertainties in the coming days you requested our consultancy to find out the optimal transfer limit at which the money need to be transferred to Central Reserve Bank from Hampshire & Kent Bank to maximize the profit of Hampshire & Kent bank as the cost of transfer and the interest is fixed.
In order to propose a solution to your problem we decided to make the best use of @risk software as this provides us the chance to build a model which can perform multiple iterations at the given conditions in very less amount of time and gives us a chance to make the optimized decision for the transfer limit. This report contains the information such as why we have considered £800,000 as the optimal transferable limit for Hampshire & Kent bank and comparison between various transfer limit, deposits made through out the period of 365 days.
DESCRIPTION OF THE MODEL:
The simulation model which I have chosen comprises of the following rudiments.
1. Inputs – Theses are again categorized into known and unknown inputs. Known inputs being the transaction cost which is £400 per transfer, the interest rate per annum which is 3%, Mean (50000) and standard deviation (5000) and interest rate/day is 0.0082% (3/365).
Unknown inputs being the daily cash flow of money into the bank because I have considered the deposits made to be random.
2. The Deciding Variable – This being the transfer limit at which the amount accrued in the Hampshire & Kent Bank need to be transferred to Central Reserve Bank.
3. Output – The profit earned by Hampshire & Kent bank over the transaction costs and money transferred by the Hampshire & Kent bank to Central Reserve bank for the whole year.
4. Simulation – It provides the insights of random deposits made in the Hampshire & Kent Bank and details about the profit made by the bank at various transferable limits.
ASSUMPTIONS:
In order to get an optimized result, I have made some assumptions in the model.
· The cost of transfer incurred when a transfer made by Hampshire & Kent Bank to Central Reserve Bank is subtracted from the final deposit made to Central Reserve Bank.
· Money transfer to Central Reserve Bank happens at the end of the day.
· At the Beginning of the day Interest is compounded and calculated on the amount available at the Central Reserve Bank.
· Subsequently the amount deposited in Hampshire & Kent Bank doesn’t keep any reserve and will be transferred to Central Reserve Bank as the average daily deposits will be more than the withdrawals made.
CRITERIA FOR EVALUATION:
To ensure the result to be precise, I have run the model for a period of 365 days to get a better picture in the long run. While running the simulation I have considered that each day on an average of 50000 or more will be deposited than they withdraw by generating random values for deposits made using @risk. When the amount accumulated in Hampshire & Kent bank reaches the transfer limit it’ll be transferred to Central Reserve Bank after subtracting the cost incurred on the transfer. By all trial and error methods I have compared the outputs and concluded that the limit which I suggested produces maximum average profit.
DESCRIBING THE OUTPUT:
Hence, if you implement my recommendation whenever the amount accrued in Hampshire & Kent bank reaches the transferable limit £800,000 or more it gets transferred to the Central Reserve Bank and the average profit earned by the Hampshire & Kent bank per year will be £257,909.78 as per the simulation output. As we have considered the deposits made on each day to be random at Hampshire & Kent bank the minimum income will be £251,986.04 and maximum income will be £261,928.27 in a year can also been seen from the graph below. Moreover, from the graph we can state that during simulation 90% of the time the income is amongst £254,029 and £259,335. With this context I can deduce that the chance of having bank income of less than £254,029 is 5%. Henceforth, I can confidently say that the probability of bank’s income being more than £254,029 is 95%.
COMPARISON:
The graph below depicts the profit made by the Hampshire & Kent bank at various transfer limits. I have made this comparison to know how the Bank’s income is impacted. You can identify that the transfer limit proposed by me is making the maximum average profit.
LIMITATIONS:
As you can identify in the model that we have considered has random deposits and withdrawals which are made at the bank, so we can’t determine exact profit what Hampshire & Kent bank makes in a year because there are so many assumptions and varied outcomes are involved.
CONCLUSION:
Nevertheless, after performing thorough analysis of the simulation output from the model I can assure that the transfer limit £800,000 which I suggested will make the most from the interest earned with nominal transfer cost by maximizing the Hampshire & Kent bank’s average profit in a year.
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