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Title: Treasury Management Model with Foreign Exchange Exposure
Authors: Volosov, K
Mitra, G
Spagnolo, F
Lucas, CA
Keywords: Scenario generation;Stochastic programming;Fx currency hedging;Value at risk;Vector error correction model;Treasury management;Forward price;Spot price;Mark to market
Issue Date: 2005
Publisher: Springer
Citation: Computational Optimization and Applications, 32(1-2): 179-207(29), Oct 2005
Series/Report no.: CARISMA;CTR/28/04
Abstract: In this paper we formulate a model for foreign exchange exposure management and (international) cash management taking into consideration random fluctuations of exchange rates. A vector error correction model (VECM) is used to predict the random behaviour of the forward as well as spot rates connecting dollar and sterling. A two-stage stochastic programming (TWOSP) decision model is formulated using these random parameter values. This model computes currency hedging strategies, which provide rolling decisions of how much forward contracts should be bought and how much should be liquidated. The model decisions are investigated through ex post simulation and backtesting in which value at risk (VaR) for alternative decisions are computed. The investigation (a) shows that there is a considerable improvement to “spot only” strategy, (b) provides insight into how these decisions are made and (c) also validates the performance of this model
Appears in Collections:Dept of Mathematics Research Papers
Mathematical Sciences

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