Laila, an Egyptian Broker, Is Currently Trying to Maximize Her

Essay

Laila, an Egyptian broker, is currently trying to maximize her profit in the bond market. Four bonds are available for purchase and sale at the bid and ask prices shown in the table below: Laila can buy up to 1000 units of each bond at the ask price or sell up to 1000 units of each bond at the bid price. During each of the next 3 years, the person who sells a bond will pay the owner of the bond the cash payments shown in the table below: Laila's goal is to maximize her revenue from selling bonds less her payment for buying bonds, subject to the constraint that after each year's payments are received, her current cash position (due only to cash payments from bonds and not purchases or sales of bonds) is nonnegative. Note that her current cash position can depend on past coupons and that cash accumulated at the end of each year earns 13% annual interest. Determine how to maximize net profit from buying and selling bonds, subject to the constraints previously described. Why do you think we limit the number of units of each bond that can be bought or sold?