Summary
BankOfSimio is a global custodian bank that offers currency exchanges for their clients. For example, a client may want to purchase equity in a British company that conducts their business in British Pound Sterlings (GBP), but the client wants to spend United States Dollars (USD). BankOfSimio will take the USD and give out GBP so that client can then purchase the desired equity. BankOfSimio will then take a small percentage on each exchange that it provides. Clients expect their exchanges to happen in a timely manner so that their transactions are not delayed. Therefore, BankOfSimio must hold cash on hand for each type of currency that it will exchange.If at the end of the day, BankOfSimio has a net increase in one type of currency and a decrease in another, BankOfSimio will conduct a settlement with CLS (Continuous Linked Settlement Bank International). For a small percentage fee, CLS will take the excess currency that BankOfSimio has and return the equivalent amount in the currency they are lacking. This settlement confines the risk that BankOfSimio has to a single day, which is known as intra-day liquidity risk. If BankOfSimio needs a specific type of currency to support their transactions before the end of the day, they can conduct a midday swap with one of their counterparties. This is the same service that CLS provides but is more expensive and causes a delay in the exchange, which can lead to dissatisfied clients.As a major bank in global finances, BankOfSimio is legally obligated to manage risk. If they are unable to support client transactions for even a short length of time, it can cause a disruption in the financial market. Accordingly, the government requires that BankOfSimio prove that they have sufficient funds on hand to avoid lengthy delays across a variety of stress tests. Choosing the amount of each type of currency to keep on hand is a difficult problem. Students will be asked to simulate system activity (e.g., cash flows from transactions, swaps, and settlements) to find the profit maximizing quantities subject to acceptable risk. Your team will deliver a video presentation and executive summary to BankOfSimio management with your findings and proposals.
