Construct the model and Solve by SAS!!
. Baldwin Enterprises is a large manvaf acturing company with operations and sales divisions located in the United States and several other countries. The CFO of the organization, Wes Hamrick, is concemed about the amount of money Bakdwin has been paying in transaction costs in the foreign exchange markets and has asked you to help optimize Baldwin's foreign exchange treasury functions With opcrations in several countries, Baldwin maintains cash assets in several dafferent currencics: U.S. dollars (USD)te Europcan Union's curo (EUR) Great Britain's pound (GBP), Hong Kong dollars (HKD), and Japanese yen JPY)To meet the different cash flow requirements associated with its operations asound the world, Baldwin often mast mowe funds fom one location (and currency) to another For instance, so pay an unexpectod maintenance expense at its facility in Japan, Baldwin might need to convert some of its holdings in U.S. dollars to Japanese yen The foreign exchange (FX) market is a netwoek of financial institutions and brokers in which individuals, businesses, banks, and goversments buy and sell e currencies of d flerent countries. They do so to finance international trade. invest or do basiness abroad, or speculate on currency price changes. The FX market operates 24 hours a day and represents the largest and most liquid marketplace in the global cconomy. On average, the oquivalent of about $1.5 trillion in different currencics is traded daily in the FX market around the world The liquidity of the market provides businesses with access to intemation markets for goods and services by providing foreign currency necessary for transactions worldwide, The FX markct opcratcs in much the same way as a stock or commodity market there is a bid price and ask price for each commodity (or, in this case, currency) A bid price is the price at which the market is willing to buy a particular currency and the ask price is the price at which the market is willing to sell a curency. The ask prices are typically slightly higher than the bid prices for the same curnency -representing the transaction cost or the profit carned by the organizations that keep the market liquid. The following table sammarizes the curent FX rates for the currencies Baldwin currently holds. The entries in this table represent the conversion rates from the tow currencics to the column currencies. change Rates USD USD EUR GBP HKD JPY 1.01864 0.6409 7,7985 118.55 EUR GBP 0.9724 1 0.6295 7.6552 11641 12.154 18497 5593 588 0.12812 0.1304 0.0821 1 000843 0,00856 0,0054 0,0658 HKD 15.1005 UPY For example, the table indicates that one British pound (GBP) can be exchanged (or sold) for 1.3593 US. dollars (USD). Thus, S1.5593 is the bid price, in U.S dollars, for one British pound. Altematively, the table indicates one U.S. dollar (USD) can be eschangod (sold) for 0.6409 British pounds (GBP). So, it takes about 1.5603 US. dollars (or 106409) to buy one British pound (or the ask price, in U.S. dellars, for one British pound is roughly SI.5603). Notice that if you took one British pound, converted it to 1.3393 US dollars, and then converted those 1.5593 dollars back to British poands, you would end up with only 0999333 British pounds (i.e. 13393 x 0.6409-0.999333). The money that you lose in this exchange is the transaction cost. Baldwin's current portfolio of cash holdings ineludes 2 million USD,5 millon EUR, I millien GBP, 3 milion HKD, and 30 million JPY. This ponfolio is eqguivalent to $9,058,710 USD under the current exchange rates (given above). Wes has asked you to design a currency trading plan that would increase Baldwin's euro and yen holdings to 8 million FUR and 54 JPY, respectively, while maintaining the equivalent of at least $230,000 USD in each curency, Baldwin measures transaction costs as the change in the USD oquivalent valuc of the portfolio. A. Formulate and LP model for this problem using exeel (2 points) B. What is the optimal trading plan and transaction cost ( point) C. Suppose that another executive thinks that holding $250,000 USD in each currency is excessive and wants to lower the amount to $50,000 USD in each currency. Does this help to lower the transaction cost? Why or why sot? (1 point) D. Suppose the exchange rate for converting USD to GBP increased from 0.6409 to 0.6414. What would happen to the optimal solution in this case? ( poim) . Baldwin Enterprises is a large manvaf acturing company with operations and sales divisions located in the United States and several other countries. The CFO of the organization, Wes Hamrick, is concemed about the amount of money Bakdwin has been paying in transaction costs in the foreign exchange markets and has asked you to help optimize Baldwin's foreign exchange treasury functions With opcrations in several countries, Baldwin maintains cash assets in several dafferent currencics: U.S. dollars (USD)te Europcan Union's curo (EUR) Great Britain's pound (GBP), Hong Kong dollars (HKD), and Japanese yen JPY)To meet the different cash flow requirements associated with its operations asound the world, Baldwin often mast mowe funds fom one location (and currency) to another For instance, so pay an unexpectod maintenance expense at its facility in Japan, Baldwin might need to convert some of its holdings in U.S. dollars to Japanese yen The foreign exchange (FX) market is a netwoek of financial institutions and brokers in which individuals, businesses, banks, and goversments buy and sell e currencies of d flerent countries. They do so to finance international trade. invest or do basiness abroad, or speculate on currency price changes. The FX market operates 24 hours a day and represents the largest and most liquid marketplace in the global cconomy. On average, the oquivalent of about $1.5 trillion in different currencics is traded daily in the FX market around the world The liquidity of the market provides businesses with access to intemation markets for goods and services by providing foreign currency necessary for transactions worldwide, The FX markct opcratcs in much the same way as a stock or commodity market there is a bid price and ask price for each commodity (or, in this case, currency) A bid price is the price at which the market is willing to buy a particular currency and the ask price is the price at which the market is willing to sell a curency. The ask prices are typically slightly higher than the bid prices for the same curnency -representing the transaction cost or the profit carned by the organizations that keep the market liquid. The following table sammarizes the curent FX rates for the currencies Baldwin currently holds. The entries in this table represent the conversion rates from the tow currencics to the column currencies. change Rates USD USD EUR GBP HKD JPY 1.01864 0.6409 7,7985 118.55 EUR GBP 0.9724 1 0.6295 7.6552 11641 12.154 18497 5593 588 0.12812 0.1304 0.0821 1 000843 0,00856 0,0054 0,0658 HKD 15.1005 UPY For example, the table indicates that one British pound (GBP) can be exchanged (or sold) for 1.3593 US. dollars (USD). Thus, S1.5593 is the bid price, in U.S dollars, for one British pound. Altematively, the table indicates one U.S. dollar (USD) can be eschangod (sold) for 0.6409 British pounds (GBP). So, it takes about 1.5603 US. dollars (or 106409) to buy one British pound (or the ask price, in U.S. dellars, for one British pound is roughly SI.5603). Notice that if you took one British pound, converted it to 1.3393 US dollars, and then converted those 1.5593 dollars back to British poands, you would end up with only 0999333 British pounds (i.e. 13393 x 0.6409-0.999333). The money that you lose in this exchange is the transaction cost. Baldwin's current portfolio of cash holdings ineludes 2 million USD,5 millon EUR, I millien GBP, 3 milion HKD, and 30 million JPY. This ponfolio is eqguivalent to $9,058,710 USD under the current exchange rates (given above). Wes has asked you to design a currency trading plan that would increase Baldwin's euro and yen holdings to 8 million FUR and 54 JPY, respectively, while maintaining the equivalent of at least $230,000 USD in each curency, Baldwin measures transaction costs as the change in the USD oquivalent valuc of the portfolio. A. Formulate and LP model for this problem using exeel (2 points) B. What is the optimal trading plan and transaction cost ( point) C. Suppose that another executive thinks that holding $250,000 USD in each currency is excessive and wants to lower the amount to $50,000 USD in each currency. Does this help to lower the transaction cost? Why or why sot? (1 point) D. Suppose the exchange rate for converting USD to GBP increased from 0.6409 to 0.6414. What would happen to the optimal solution in this case? ( poim)
