LINEAR PROGRAMMING APLICATION: Foreign Exchange Management Deac International has manufacturing and sales operations in five major

trading countries: United States, United Kingdom, Canada, Germany and Australia !ecause of the different cash needs in the different regions at various times, it is often necessary to move availa"le funds from one region to another In general, there #ill "e numerous #ays to e$change availa"le currencies satisfy the re%uirements &n this particular 'uesday the divisions in 'he United Kingdom and Canada are short of cash: ( million G!) and * million CAD is re%uired 'he divisions in the United States, Germany and Australia have e$cess cash of + million dollars, , million -uros and . million AUDs 'he prevailing e$change rates are as follo#s: USD 1 1."5 $00 0."5"$ $ 1.5%#!"0 0."15!00 G!) 0.50 !"# 1 0.%"110! 0.!"1" 0 0.%#&&$0 CAD 1.0$ %10 $.0 %50 1 1.#1$5 0 0."5%#$0 -U/ 0.# ##!5 1.$1#0%"1 0.#1#15#" 1 0.5"1""#0 AUD 1.0!5!%# $.0"!! 1 0.#0&!%$ 1.#&0% 5 1

0e #ill refer to the rate in ro# i and column j as aij #hich is the "id price of currency i in units of currency j 1or instance a person #ith a !ritish pound #ill receive 23 45,+ in e$change 23 45,+ is then the bid price for a unit of G!) in US dollars &n the other hand, if a person #ants to "uy a G!) he #ill receive 6 56,74* G!) for every US dollar 'his means that it ta8es 396 56,74* : 23 4.(4,6 to purchase one G!) 'his is the ask price of G!) to a person #ith US dollars 'he slight difference "et#een the "id and as8 prices represents the transaction cost of trading in the mar8et ;ormally the "id and as8 prices are such that there is no ar"itrage opportunity<< if one 8ept e$changing money from one denomination to another and "ac8 again one #ould lose money !ecause there are many #ays of redistri"uting the cash to satisfy the shortages, the challenge for the manager is to find the most efficient e$changes of currencies Due to comparatively short<term high US interest rates, Deac International #ants to ma$imi=e the >dollar value? of all the currencies held 1or any currency the dollar value is defined to "e the average of the "id and the as8 prices 1or instance, the dollar value of one G!) is @23 45,+ A 23 4.(4,B 9+ : 23 4*46*5 '(e)tion) 3 0hat is the dollar value of the "as8et of currencies the company holds currently "efore any e$changes are underta8enC + 0rite out a linear programming model to determine the set of e$changes to "e made so that all cash re%uirements are satisfied and the sum of the dollar value of all currencies held after the e$changes is ma$imi=ed Dint: Use the decision varia"les: Xij: amount of currency i sold to o"tain currency j ;otice that this has the effect of reducing currency i "y Xij and increasing currency "y aij Xij 1or

e$ample, if one #ere to sell X3+ dollars to "uy pounds, oneEs dollars #ould "e reduced "y X3+ "ut the G!) "alance #ould increase "y a3+ X3+ or "y 6 56,74* X3+ G!) Yi : 1inal "alance of currency i held ;otice that the final amount of any currency, i held #ill "e e%ual to the 8no#n "eginning holding of that currency, @+ million for dollars, for instanceB less the amounts of currency i used to "uy other currencies, plus any other currency e$changed into currency i Use this reasoning to #rite e%uations relating Y, final holding varia"les to X, e$change varia"les , Use Solver to determine the "est set of currency e$changes ( If the re%uirement for G!) and CAD did not e$ist #ould the "est strategy "e to stay patC &r, is there an opportunity to improve the dollar value of the e$isting "as8et of currencies #ith some carefully considered e$changesC 5 Assume the re%uirements for G!) is 5 million instead of (C 0hat effect #ill this have on the pro"lem and its solutionC * Suppose, for a moment, the "id< as8 prices #ere such that if one started #ith one dollar, e$changed it for some G!)s, e$changed the G!)s for AUDs and finally e$changed the AUDs "ac8 into dollars one ended up #ith more than one dollar Can such a situation persist for a long timeC -$plain your reasoning "riefly If you tried to solve the linear programming a"ove in + #ith such e$change rates, #hat can you say a"out the solution of the pro"lemC