Optimal investment in the foreign exchange market with proportional transaction costs
AbstractWe 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.
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Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Quantitative Finance.
Volume (Year): 11 (2010)
Issue (Month): 4 ()
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Web page: http://www.tandfonline.com/RQUF20
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- Lu, Jin-Ray & Chan, Chih-Ming & Wen, Mei-Hui, 2012. "Which demands affect optimal international portfolio choices?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 22(5), pages 1292-1306.
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