Report generating linear programming model for scheduling the issuance of large certificates of deposit

Abstract

Scope of Study: This study concerns a linear programming model which schedules the issuance of large ($100,000 or over) Certificates of Deposit (CD's) by a commercial bank. The objective of the study is to construct a model that will generate management reports based on the solution of the linear programming model. The solution of the linear programming problem represents a minimization of the total interest cost for all Certificates of Deposit to be issued during a 13-month period, based on an interest rate forecast supplied by the Chase Econometric Institute, subject to constraints which reflect management policy with respect to growth, turnover, and liquidity of the CD portfolio and the types of markets serviced by these instruments. The management reports prepared by the model are a summary of the linear program solution based on statistics of sales, outstanding amounts, and weighted average interest rates per type of instrument.

Findings and Conclusions: The model predicts an optimal CD sales schedule for thirteen months while minimizing the total interest cost of the sales over the planning period and generates four management reports based on the sales schedule predicted. However, the model involves only one type of liability of the bank and assumes certainty in predicting the CD sales schedule. The results of this study suggest that further research concerning the inclusion of risk constraints, more comprehensive management policy considerations, and economic considerations into the model is needed to make the model a more effective management decision making tool.