Matrices in the Market Place

Author(s): F. D. Parker
Source: Mathematics Magazine, Vol. 38, No. 3 (May, 1965), pp. 125-128
Published by: Mathematical Association of America
Stable URL: http://www.jstor.org/stable/2688769 .
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 MATRICES IN THE MARKET PLACE
F. D. PARKER, SUNY at Buffalo
Introduction.One oftenhears the storyof the young American in a foreign
bank who borrowsten dollars,exchangesthem forfrancs,the francsforrupees,
the rupees forpounds sterling,and the pounds sterlingfordollars, all of which
allows him to returnthe loan of ten dollars and pocket a profit.True or not, it
would seem that such transactionsare susceptibleto mathematicaltreatmentif
an appropriate model is available. Such a model mightbe expected to finddis-
crepancies in the foreignexchange system or any similar system. Since such
systems are subjected to frequent,almost continuous,fluctuations(as well as
incompleteinformation)it would seem that a shrewd manipulatorcould take
advantage of such discrepanciesto his financialgain.
As it happens, there is such a model, a model which has some nontrivial
properties.The same model occurs in one aspect of group theory.
Equitable matrices.We beginby consideringa systemofn sets. Each set con-
tains elementsto which a value can be assigned (each elementof a set has the
same value). Each elementof set Si can be exchanged foraij elementsof set Sj.
Now the systemcan be describedby a square matrixof ordern whose entryin
row i, columnj is a%j.To keep an application in mind, the elementsof a given
set can be dollars, bushels of wheat, shares of stock, one day's labor, etc. For
such a system to be equitable, i.e., that there is no financialadvantage to be
gained by bartering,theremust be certain conditionson the matrix.
1. a3j>0 forall i, j.
2. aii= 1 forall i.
3. aijaj= 1 forall i, j.
4. a japk=aik for all i, j, k.
The fourthconditionis the importantone whichdemands that a transaction
involving, for example, exchanging dollars for francs,then francs for rupees,
yields as many rupees as the directexchange of dollars forrupees.
In fact,these fourconditionscan be replaced by the followingdefinition
An equitablematrixis a square matrixof order n with positive entriessuch
that aijaJk=aik for all i, j, k.
Equitable matriceshave some interestingproperties,some of which are de-
scribed by the followingtheorems.
THEOREM I. If 21 is an equitablematrixof ordern, thenM2 =nM.

Proof. The elementof M2 in row i columnj is given by

n n

aikakj = E a = naii.
k=1 k=1

THEOREMII. If S is a square matrixof ordern consistingentirelyofunityele-

ments,thenS is an equitable matrix,and any equitable matrix (of ordern) is
similar to S.
125

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 126 MATHEMATICSMAGAZINE [May-June

Proof. It is immediate that S is an equitable matrix. To show that M is

similar to S, we can actually find the matrix P such that P-IMP = S. Let
P=diag (1, a21, a3l, * * * a,,), then P-1=diag (1, a12,a13, * * *, ain). Then the
elementin the ij position of MP becomes aijaj, =ail. Premultiplicationby P-
now providesin the ij positionof P-'MP the elementalail =a ll1.

THEOREMIII. All equitablematricesofordern are similar,and theircharacter-

istic values are (n, 0, 0, , 0).

Proof.Since any equitable matrixis similarto S, theyare all similarto each

other. The characteristicvalues of S are easily shown to be (n, O, O, * * * , 0).

THEOREM IV. Equitable matricesforma commutative groupunderHadamard

multiplication.(The Hadamard productof [aij] and [bij] is [aijbij].)

Proof. Considertwo equitable matricesA and B. The entryin row i, column

j of the Hadamard product is aijbij,and the entryin rowj, column k is ajkbjk.
But aijbijajkbjk=ai,kbik, which is the entryin row i, column k. Hence equitable
matricesare closed with respectto Hadamard multiplication.Associativityand
commutativityare immediate, S serves as the identityand the transpose of a
given equitable matrixis its inverse.
The group itselfdoes not appear to be very interesting,being isomorphicto
the directproduct of n-1 groups,each group being the multiplicativegroup of
positive real numbers.This is proved by realizingthat only n-1 entriesof an
equitable matrixcan be independent.To put it another way, as soon as the ex-
change rate is known fora unit of a given class in termsof a unit of each of the
other classes (a row of the matrix),then the matrixis uniquely determined.

THEOREMV. A matrixwhichdiagonalizesan equitablematrixM is givenby

-1 0 0 0 * -O -1-

a2l a2l 0 0 ... 0

a3l -a3l a3l 0 . . . 0 ?

a4l 0 -a4l a4l .. . O ?

_anl ?
0 * * *a,,, a?t_j

Proof.Direct multiplicationyields MR = RA, whereA = diag (n, 0, 0, *. , 0).

Inequitable matrices. What about inequitable matrices? How can they be
discovered and exploited? Consider an ideal situation in which only one ex-
change rate is altered froman equitable situation. If, forexample, the rate of
exchange of a unit of commodityi fora unit of commodityj changes fromaij
to aij+h, then the matrix M2-nM no longer is identicallyzero. The change
occursin rowi, and in columnj, and thenM2-nM is

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1965] MATRICES IN THE MARKET PLACE 127

halj
O ha2j 0

hail hai2 . . . 2h . . . hain .

L hanjOj
] _
An individual who owns k units of any commodityp can exchange them for
ka,i units of commodityi, then ka,,(ajj+h) units of commodityj, and finally
ka,j(ajj+h)(ah,) units of his originalcommodity,thus realizinga profitof kha1i
units of commodityp. If h is negative,the transactionsare made in the reverse
order,yieldinga profitof -kh/(aij+h) units of commodityp.
Of course, this is an extremelyunsophisticatedmodel, but it is conceivable
that an individual with reliable informationon a wide market,and with high-
speed computingfacilitiesforkeepingan almost continuousrecordof the matrix
l2-nM mightbe able to take advantage of a market discrepancybeforethe
usual forcescould react to restoreequilibrium.The model does show, moreover,
that a profitcan be made by an individual owning any commodity,and that
only three transactionsare necessary.Thus we reach the conclusion that some
of the transactionscarriedout by the "young American" were superfluous.
So far we have disregardedthe usual fees which are associated with such
transactions (commissions,taxes, brokers' fees, etc.). Suppose that such fees
are directlyproportionalto the amount of the transaction,and that one unit of
commodityp no longeris worthap, units of commodityi, but ratherrap,sunits
of commodityi(r<1). If r is too small, then it is possible that no transaction
can be profitable;in practice,r has a damping effecton the tradingactivity of
a market.Again consideringthe case in which only one exchange rate is altered
froman equitable rate aij to aij+h, we findnow that the conversionof one unit
of commodityp to commodityi to commodityj to commodityp now produces
r3api(aij+ h)aj,
units of commodityp. Unless h is large enough,therewill be no profit.The con-
dition fora profitabletransactionis hr3> aij(l - r3). If h is negative, the trans-
actions are carried out in the opposite direction,and one unit of commodityp
now becomes
1
r3apj asp
ai1+ h
units of the same commodity,and the conditionfora profitabletransactionis
-hf> (1 -r3)aij.
An applicationto grouptheory.In abstract algebra we frequentlyencountera
finiteset G with a binaryoperation. If forany two elementsa and b of G there
is a unique solutionto the equation ax = b and a unique solutionto the equation

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128 MATHEMATICS MAGAZINE [May-June

ya = b, then G is a quasigroup. If at the same time there is a distinguishedele-

ment e such that ae=ea=ca forall a in G, then G is a loop. If, in addition, the
associative law a(bc) = (ab)c holds for all a, b, c in G, then G is a group. Since
groupshave been extensivelystudied and possess much strongertheoremsthan
do loops, it is oftendesirableto determinewhethera given loop is a group. If the
multiplicationtable of the loop is arranged so that the distinguishedelement e
lies on the main diagonal (the normal form)and the table is considered as a
matrix,then Zassenhaus [1] has shown that the associative law is equivalent
to the conditionatjajk=aik. This is preciselythe requirementforan equitable
matrix. Therefore,a necessary and sufficientcondition that a loop be a group
is that P-1MP = S, where M is the Cayley table in normalform,P-1 and P are
the diagonal matricesdescribed in Theorem II, S is composed of entriesall of
which are the distinguishedelemente, and the operationsare carriedout in the
binary operation of the system.
References
1. H. J. Zassenhaus, The theoryof groups,Chelsea, New York, 1949.
2. F. D. Parker, When is a loop a group?, Amer. Math Monthly, 72 (1965) No. 7.

ON PEDAL RATIOS
D. MOODY BAILEY, Princeton,West Virginia

ThroughP, a point in the plane of triangleABC, rays AP, BP, CP are con-
structedto meet sides BC, CA, AB at respectivepoints D, E, F. From P per-
pendicularsare dropped to the sides of the triangletherebydeterminingpoints
G, H, I. Triangles DEF and GHI are usually called the cevian and pedal tri-
angles of point P with respectto triangleABC. Sides BC, CA, AB will be repre-
sented by a, b, c as an effortis made to express pedal ratios BG/GC, CH/HA,
AI/IB in termsof cevian ratios BD/DC, CE/EA, A F/FB and the sides of tri-
angle AB C.
A beginning is made by considering the well-known equality A P/PD
=AE/EC+AF/FB [1, Theorem 1]. Suppose that positive unity be added to
both members of this equation. Then AP/PD+1=AE/EC+AF/FB+1, or

-A

B J GD C

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