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Optimal investment in the foreign exchange market with proportional transaction costs

Veraart, Luitgard A. M. (2011) Optimal investment in the foreign exchange market with proportional transaction costs. Quantitative Finance, 11 (4). pp. 631-640. ISSN 1469-7688

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Abstract

We consider an investor in the foreign exchange market who can trade in two currencies, domestic and foreign. The investor seeks to optimize the expected mark-to-market value of the portfolio while aiming for a certain target proportion of the holdings in foreign currency compared with total wealth. This target proportion is exogenously given and can be thought of as a constraint imposed by risk management. The exchange rate process is modeled as a geometric Brownian motion. Proportional transaction costs are charged. We present a numerical algorithm that solves the resulting free boundary problem.

Item Type: Article
Official URL: http://www.tandf.co.uk/journals/rquf
Additional Information: © 2010 Routledge, Taylor & Francis
Library of Congress subject classification: H Social Sciences > HG Finance
Sets: Departments > Mathematics
Rights: http://www.lse.ac.uk/library/usingTheLibrary/academicSupport/OA/depositYourResearch.aspx
Date Deposited: 11 May 2011 14:01
URL: http://eprints.lse.ac.uk/36103/

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