Currency arbitrage detection using a binary integer programming model

In this article, we examine the use of a new binary integer programming (BIP) model to detect arbitrage opportunities in currency exchanges. This model showcases an excellent application of mathematics to the real world. The concepts involved are easily accessible to undergraduate students with basi...

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Bibliographic Details
Published in:International journal of mathematical education in science and technology Vol. 42; no. 3; pp. 369 - 376
Main Authors: Soon, Wanmei, Ye, Heng-Qing
Format: Journal Article
Language:English
Published: London Taylor & Francis Group 01.04.2011
Taylor & Francis, Ltd
Taylor & Francis Ltd
Subjects:
binary integer programming
Computation
Currency
currency arbitrage detection
Equations (Mathematics)
Foreign Countries
Higher Education
Integer programming
Linear programming
Mathematical Applications
Mathematical Concepts
Mathematical Models
Mathematics
Mathematics Education
Monetary Systems
network simplex method
Numbers
Operations Research
Programming
Studies
Undergraduate Students
ISSN:0020-739X, 1464-5211
Online Access:Get full text
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Summary:In this article, we examine the use of a new binary integer programming (BIP) model to detect arbitrage opportunities in currency exchanges. This model showcases an excellent application of mathematics to the real world. The concepts involved are easily accessible to undergraduate students with basic knowledge in Operations Research. Through this work, students can learn to link several types of basic optimization models, namely linear programming, integer programming and network models, and apply the well-known sensitivity analysis procedure to accommodate realistic changes in the exchange rates. Beginning with a BIP model, we discuss how it can be reduced to an equivalent but considerably simpler model, where an efficient algorithm can be applied to find the arbitrages and incorporate the sensitivity analysis procedure. A simple comparison is then made with a different arbitrage detection model. This exercise helps students learn to apply basic Operations Research concepts to a practical real-life example, and provides insights into the processes involved in Operations Research model formulations.
Bibliography:SourceType-Scholarly Journals-1
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ISSN:0020-739X
1464-5211
DOI:10.1080/0020739X.2010.526248