Linear programming in the foreign exchange markets

Abstract

This article demonstrates the use of a linear programming model to achieve an optimal allocation of liquid funds amongvarious currencies in different countries. The model takes into account interest rates,projected changes in currency values, relative risk and corporate policies and sahguards. Currency trading has reached unprecedented proportionst 1.5 trillion dollars are traded daily and the volume keeps increasing. Worldtrade in goods,for comparison,amounts to $ 4 trillion per year. Several developments triggered this expansion: a. Technological breakthroughs in telecommunications enable traders to move,at the speed of light, vast sums of money, via satellite links, across continents, with the stroke of a key. b. Deregulation of foreign currency markets.c. The move from fixed to floating exchange rates.Globalization and the growth of the currency markets,produced new opportunities and additional risks. Toyota made in one year $ 3 billion profit from the sale of cars and $1.2 billion from currency trading. Caterpillar lost $ 57 million from regular operations but made $ 89 million from currency trading,ending the year with a profit of $ 32 million. Since the volume,complexity and risk involved in currency transactions are substantial,and the consequences devastating,a precise,quantitative model could prove invaluable.