Optimal investment in the foreign exchange market with proportional transaction costs

Luitgard Veraart

Quantitative Finance, 2010, vol. 11, issue 4, 631-640

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.

Keywords: Applied mathematical finance; Consumption-portfolio choice; Continuous time dynamic finance; Control of stochastic systems (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/14697680903460150

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