Optimal Forex Portfolio

OPTIMAL FOREX PORTFOLIO
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Due Date
1.0 Introduction
A company should maintain a diversified portfolio of currencies to reduce its exposure to exchange rate risk and facilitate international business operations. However, maintaining a portfolio of multiple currencies also comes with transaction costs that include bid-ask spreads, commission fees, and other charges. Baldwin has an initial portfolio of 2 million USD, 5 million EUR, 1 million GBP, 3 million HKD, and 30 million JPY. The present project presents a currency-trading plan for Baldwin that increases its euro and yen holdings while maintaining at least USD 250,000 in each currency. With the use of Excel Microsoft Solver and considering the forex exchange rates, the solution seeks to minimize transaction costs while achieving the desired increase in euro and yen holdings.
2.0 Statement of Findings
The solver output presents an optimal trading plan that satisfies all constraints and minimizes the transaction cost. From the solution, Baldwin should convert some of the initial portfolio holdings into EUR and JPY while maintaining the minimum required amounts of USD, GBP, and HKD. Specifically, the optimal plan involves converting 1,376,857 USD, 998,696 GBP, and 4,834,882 HKD to EUR, and converting 13,019,099 JPY to USD. This plan increases the EUR holdings to the desired 8 million, and the JPY holdings to the desired 54 million, while maintaining the minimum required amounts in USD, GBP, and HKD.
The transaction cost of the trading plan is $28,161.83 resulting in a final portfolio value of US$ 9,030,398. This means that to adjust Baldwin's current portfolio of cash holdings to the target values (8 million EUR and 54 million JPY) while maintaining the equivalent of at least USD 250,000 in each currency, it would cost approximately USD 28,161.83. This transaction cost is calculated as the difference in the USD equivalent value of the portfolio before and after the currency trades. Notably, the result is based on the assumptions and constraints set in the model and does not account for possible variations in exchange rates, which could significantly affect the actual transaction cost.
The sensitivity analysis offers insights into the effects of changes in certain parameters of the model on the final solution. It offers valuable insight for decision-making, helping to understand the impact of changes in the constraints and the robustness of the current optimal solution. For the USD, the company can increase the minimum required amount of USD in the portfolio by about 31,850.07 units or decrease the minimum required amount by 88,309.59 units before the current optimal solution becomes invalid. For the GBP, the company can increase the minimum required amount of GBP in the portfolio by about 20,429.29 units or decrease the minimum required amount by about 56,643.59 units before the current optimal solution becomes invalid. The HKD has an allowable increase of about 248,801.80 units and an almost infinite allowable decrease (1E+30 HKD) before the current optimal solution becomes invalid. For the EUR, the allowable increase in the portfolio is about 32,443.76 units, and the allowed decrease of about 89,955.68 units before the solution becomes invalid. The JPY has an...