Managing intra-day liquidity risk in banking

Abstract

SafeBank is a major custodian bank in the global financial market. One of the services SafeBank provides is changing currencies for their clients. For example, if a client wants to buy equity in a German company denominated in EUR, and the client wants to spend USD, SafeBank will take the USD and give out EUR, which allows the client to conduct their transaction. SafeBank makes money by charging the client a small percentage on each exchange. There are thousands of random, unpredictable transactions every day, and they require SafeBank to hold cash in each type of currency. At the end of each day (6:30PM ET), SafeBank conducts a settlement with CLS Bank (Continously Linked Settlement Bank) to reset the quantities of each type of currency. For example, if over the course of the day the sum of all transactions causes SafeBank to have a net increase in USD and a net decrease in EUR, they will give the excess USD to CLS and CLS will return the equivalent amount of EUR. CLS charges SafeBank a small percentage on this exchange. This confines the risk to SafeBank to a single day (known as intra-day liquidity risk). If SafeBank runs out of any type of currency prior to 6:30pm ET, they can conduct a swap with one of their counterparties. This is essentially the same service provided by CLS, but it can occur anytime throughout the day. Swaps help mitigate risk, but they are expensive relative to CLS. Read the full problem: https://www.simio.com/academics/StudentCompetition/December2017/December2017_SimioCompetitionProblemStatement.pdf