Broker Sonya Wong is currently trying to maximize her profit in the bond market. Four bonds are available for purchase and sale at the bid and ask prices shown in the file S14_96.xlsx. Sonya can buy up to 1000 units of each bond at the ask price or sell up to 1000 units of each bond at the bid price. During each of the next three years, the person who sells a bond will pay the owner of the bond the cash payments listed in the same file.
Sonya’s goal is to maximize her revenue from selling bonds minus her payment for buying bonds, subject to the constraint that after each year’s payments are received, her current cash position is nonnegative. Note that her current cash position can depend on past coupons and that cash accumulated at the end of each year earns 2.5% annual interest.
Determine how to maximize net profit from buying and selling bonds, subject to the constraints previously described. Why do you think we limit the number of units of each bond that can be bought or sold?