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Group 1 PPT Currency Conversion Optimization

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Priya Varghese
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29 views13 pages

Group 1 PPT Currency Conversion Optimization

Uploaded by

Priya Varghese
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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MSM | End Term Project

Currency Conversion
Optimization
Presented By: Group 1
24P137 - Ashish Bahuguna
24P142 - Dhruv Kaushik
24P151 - Navya Rohatgi
24P154 - Khushi Verma
24P164 - Preity Chhokra
24P166 - Priya Sarah Varghese
24P169 - Rithik Misri
Case Scenario : Market Collapse
• Market Collapse:
⚬ Japanese Yen experienced a sudden devaluation (80 to 125
yen/USD)
⚬ Impact: Substantial losses in converted investments

• Firm’s Holdings:
⚬ Japan: 1.2B Yen
⚬ Indonesia: 10.5B Rupiah
⚬ Malaysia: 28M Ringgit

• Objective:
⚬ Effi ciently convert foreign investments into U.S. dollars while
minimizing costs and complying with transaction restrictions
Problem
Statement
Challenges Goals

• Exchange rate depreciation • Formulate a minimum-cost


signifi cantly impacts value fl ow problem to optimize
conversions
• Government-imposed
transaction limits on capital • Determine the most cost-
outfl ows complicate the eff ective pathways while
conversion process complying with restrictions

• High transaction fees for • Maximize the fi rm’s


currency conversion across investment value after
multiple pathways. conversion.
Data Inputs
• Investment Values:
⚬ Yen: $9.6M (15M Yen at 80 yen/USD)
⚬ Rupiah: $1.68M (10.5B Rupiah at 0.00016 USD/Rupiah)
⚬ Ringgit: $5.6M (28M Ringgit at 0.2 USD/Ringgit).
⚬ Total Holdings: $16.88M

• Transaction Limits:
⚬ Japan: Limited outfl ows due to economic stabilization
policies
⚬ Indonesia and Malaysia: Restrictive capital controls to
manage economic outfl ows

• Key Requirement:
⚬ Adhere to limits in Table
Data Inputs
Methodology
Overview
1.Compute USD Value of Holdings:
⚬ Convert the values of holdings in diff erent currencies to USD using current
exchange rates
2.Set Up Constraints:
⚬ Defi ne the transaction limits for each currency based on the values in Table
3.Defi ne Decision Variables:
⚬ Represent the amounts to be converted between nodes (currencies) as
decision variables
4.Formulate Objective Function:
⚬ Use Excel’s SUMPRODUCT function to minimize the total cost of
conversions
5.Optimization with Excel Solver:
⚬ Apply Excel Solver to optimize the currency conversion fl ow, balancing
supply and demand while adhering to the transaction constraints
6.Network Flow Approach:
⚬ Model the problem using network fl ow principles, where nodes represent
currencies and edges represent conversion fl ows
Network Flow Diagram
Solution 1: Most Cost-Effective
Conversion with Constraints
First, we defi ne the 'Objective', which in this
case is located in cells J16, highlighted in
‘Green’. Next, we confi gure Solver to minimize
the value of this objective function. The
Decision Variable Cell' is set to represent all
the values in the 'Flow' column.

For the constraints:


• The initial fl ow values of Dollar node to Yen,
Rupiah and Ringgit must be equal to
Capacity value
• The 'Flow' values are constrained by the
'Capacity', as this represents the
transaction limit
• Finally, we ensure that 'NetFlow' matches
the 'Supply/Demand'

This implies that value of the investment in U.S. bonds would be


$16,796,620
Solution 2 : Conversion Methods Without
Transaction Limits
For the constraints:
• The initial fl ow values of Dollar node
to Yen, Rupiah and Ringgit must be
equal to Capacity value
• Final constraint is to ensure that
'NetFlow' matches the
'Supply/Demand'

The methods utilized are:


• Yen -> Pound -> USD ($9.6 M)
• Rupiah -> CAD -> USD ($1.68 M)
• Ringgit -> Euro -> USD ($5.6 M)

With these constraints, we achieve the Minimum Cost Flow


Problem value of $ 0.06748 Million which is $67,480
Solution 2 : Conversion Methods Without
Transaction Limits
Network fl ow showing the conversion method
utilized
Factors Influencing Currency Conversion
• Currency Controls
⚬ Restrictions limit how much local currency can be converted into foreign currencies at
a given time
⚬ Compliance with local regulations is necessary to avoid penalties and ensure smooth
conversion processes

• Exchange Rate Volatility


⚬ Ongoing economic instability may lead to further devaluation, compounding losses if
not managed properly
⚬ Converting funds at the right time can reduce exposure to fl uctuating exchange rates

• Repatriation Delays
⚬ The process of transferring converted funds back into the home currency can take
longer than expected
⚬ Uncertainty around the exact timing of transfers makes it harder to forecast fi nancial
needs

• Economic and Political Instability


⚬ Governments may change policies suddenly, imposing stricter controls or aff ecting
currency fl ows
⚬ Holding assets in unstable countries increases the risk of devaluation or expropriation
Optimization Final
Achieved Investment
Value
• The minimum-cost
Post-conversion, the
fl ow model eff ectively
value of investments in
minimized conversion
U.S. bonds is
costs
$16,796,620
• Solver identifi ed the

Summary of
most cost-eff ective
currency conversion
paths

Cost Findings Strategic


•
Comparison
Constrained Scenario:
Insights
Conversion cost = • Removing constraints
$83,380 leads to lower costs
• Unconstrained and more effi cient
Scenario: Conversion conversions
cost = $67,480 • Continuous
• Savings = $15,900 by monitoring of
removing transaction exchange rates is
limits crucial for optimizing
conversions
Thank you
very much!

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