THE APPLICATION VIGNETTE A key part of a country’s financial infrastructure is itssecurities markets. By allowing a variety of financial institutions and their clients to trade stocks, bonds, and otherfinancial securities, they securities markets help fund bothpublic and private initiatives. Therefore, the efficient operation of its securities markets plays a crucial role in providing a platform for the economic growth of the country.Each central securities depository and its system forquickly settling security transactions are part of the operational backbone of securities markets and a key componentof financial system stability. In Mexico, an institutioncalled INDEVAL provides both the central securitiesdepository and its security settlement system for theentire country. This security settlement system uses electronic book entries, modifying cash and securities balances, for the various parties in the transactions.The total value of the securities transactions the INDEVAL settles averages over $250 billion daily. This makesINDEVAL the main liquidity conduit for Mexico’s entirefinancial sector. Therefore, it is extremely important thatINDEVAL’s system for clearing securities transactions bean exceptionally efficient one that maximizes the amount ofcash that can be delivered almost instantaneously after thetransactions. Because of past dissatisfaction with this system, INDEVAL’s Board of Directors ordered a major studyin 2005 to completely redesign the system.Following more than 12,000 man-hours devoted tothis redesign, the new system was successfully launchedin November 2008. The core of the new system is a hugelinear programming model that is applied many timesdaily to choose which of thousands of pending transactions should be settled immediately with the depositor’savailable balances. Linear programming is ideally suitedfor this application because huge models can be solvedquickly to maximize the value of the transactions settledwhile taking into account the various relevant constraints.This application of linear programming has substantially enhanced and strengthened the Mexican financialinfrastructure by reducing its daily liquidity requirementsby $130 billion. It also reduces the intraday financingcosts for market participants by more than $150 millionannually. This application led to INDEVAL winning theprestigious First Prize in the 2010 international competition for the Franz Edelman Award for Achievement inOperations Research and the Management Sciences. A) Briefly describe how linear programming was applied in this study.Then list the various financial and nonfinancial benefits thatresulted from this study.
THE APPLICATION VIGNETTE
A key part of a country’s financial infrastructure is its
securities markets. By allowing a variety of financial institutions and their clients to trade stocks, bonds, and other
financial securities, they securities markets help fund both
public and private initiatives. Therefore, the efficient operation of its securities markets plays a crucial role in providing a platform for the economic growth of the country.
Each central securities depository and its system for
quickly settling security transactions are part of the operational backbone of securities markets and a key component
of financial system stability. In Mexico, an institution
called INDEVAL provides both the central securities
depository and its security settlement system for the
entire country. This security settlement system uses electronic book entries, modifying cash and securities balances, for the various parties in the transactions.
The total value of the securities transactions the INDEVAL settles averages over $250 billion daily. This makes
INDEVAL the main liquidity conduit for Mexico’s entire
financial sector. Therefore, it is extremely important that
INDEVAL’s system for clearing securities transactions be
an exceptionally efficient one that maximizes the amount of
cash that can be delivered almost instantaneously after the
transactions. Because of past dissatisfaction with this system, INDEVAL’s Board of Directors ordered a major study
in 2005 to completely redesign the system.
Following more than 12,000 man-hours devoted to
this redesign, the new system was successfully launched
in November 2008. The core of the new system is a huge
linear programming model that is applied many times
daily to choose which of thousands of pending transactions should be settled immediately with the depositor’s
available balances. Linear programming is ideally suited
for this application because huge models can be solved
quickly to maximize the value of the transactions settled
while taking into account the various relevant constraints.
This application of linear programming has substantially enhanced and strengthened the Mexican financial
infrastructure by reducing its daily liquidity requirements
by $130 billion. It also reduces the intraday financing
costs for market participants by more than $150 million
annually. This application led to INDEVAL winning the
prestigious First Prize in the 2010 international competition for the Franz Edelman Award for Achievement in
Operations Research and the Management Sciences.
A) Briefly describe how linear programming was applied in this study.
Then list the various financial and nonfinancial benefits that
resulted from this study.
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
