Optimal Currency Composition of Foreign Exchange Reserve during Financial Crisis

The paper makes analysis of the optimal currency composition of international reserves based on Markowitz mean-variance model using Monte Carlo simulation for solution. We calculate US dollar and Euro as the two major reserve currencies for 2007 through 2009, which is also the financial crisis stage. The model suggests to decrease US dollar in late 2007 and to increase US dollar in mid 2008. Our findings are consistent with the data of UK´s Bank of England and China´s central bank. The results proves mean-variance model to be effective in offering central banks guide towards making decisions on the adjustment of the optimal weight of reserve currencies to achieve the minimum risks.