abstract
- This paper considers the problem faced by a bank which trades in the funds market so as to maintain the reserve requirements and minimize the costs of doing that. We work in a stochastic paradigm and the reserve requirements are determined by the demand deposit process, modelled as a geometric Brownian motion. The discount rates for the cumulative funds purchased and the cumulative funds sold are assumed to be different. The optimal strategy of the bank is explicitly found and it has the following structure: when bank reserves lower to an exogenously threshold level the bank has to purchase funds; when bank reserves tops an endogenously threshold level the bank has to sell funds