Foreign Currency Inventory Management in a Branch Bank

Abstract

A branch bank may decide to stock one or more foreign currencies to meet demands from its customers and may also accumulate foreign currency as a result of customer transactions. This paper presents the branch bank's foreign currency problem as an inventory management problem and derives good (and in many cases, optimal) decision rules for this type of cash management problem.

While the model presented is similar to models which have been proposed for cash management, the foreign currency problem has a number of features which lead to distinct differences. The model was developed for the Canadian situation but is generalizable to any branch having a significant volume of foreign currency transactions.