ISM Analytics Harvard Case Solution & Analysis

ISM Analytics Case Solution

Introduction

The following case focuses on the importance of the relative arbitrage activity over the use of different currencies where dollar is considered the main currency to evaluate the results in terms of gains against the exchange and the related supply or demand at the end of the arbitrage activity. Under the case, eight currencies are selected in order to determine the exchange rates and transaction costs incurred from the practice of bid and ask prices within a particular market. Thus, to evaluate the results, solver is used in order to analyze the fluctuated results within a monetary value before taking the practice to exchanges in the market. Each currency has its own value in terms of low or high price exchange against the counter one. The optimization solution from the results shows how much the value of dollar would increase or devalue according to the nature of the opposite currency. It is therefore identified that the model would provide accurate results to modify the exchanged amount in terms of units per currency and to show the importance of dollar over the use of each exchange activity.

Optimization of dollar using solver

In order to assess the currency by using the solver, a table has been drawn under the sequence of matrix where all the currencies are labeled equally in cross values. In case of USD, it shows that the vertical line represents the inflow of the currency against the exchange of all selected currencies. On the other side, horizontal line represents the outflow of the currency by exchange and converts to other currencies. So it shows what would be the net cash flow by differentiating the vertical results with that of horizontal.

From the following results, the total cash inflows from USD identified the average net gain coming from the exchange whereas the results of other currencies represent different values due to different prices and exchange rates. Therefore, this indicates that the dollar amount generates positive value at the end of the arbitrage activity and shows that it would increase its supply instead of demand over the passage of time.

Whereas the results of GBP, EUR, and GHS determine the negative values because the received amount in the major currency is less than the original (other exchange value). The reason of generating the negative value can be less transaction cost incurred in exchange of other currencies due to high demand within a market and therefore, due to the high price value against the US dollar, which can devalue the USD.

It is concluded that with high liquidity ratio, the level of supply would tend to increase because the broker would charge high transaction cost against the weak currency. Thus, a strong currency like Pound or Euro would suffer a loss against the exchange due to high demand within a particular market.

It also shows that by using the model, a more accurate picture would be analyzed by exchanging the values of different currency and optimize the results of the selected currency against the other currencies effectively. This shows that a model would be a key indicator to use on the industry level and in trying to analyze the risk factors associated with each of the selected currencies...................

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