Assessment of Potential Arbitrage Opportunities:
The first arbitrage opportunity relates to locational arbitrage. Holt has obtained spot rate quotations from two banks in Thailand: Minzu Bank and Sobat Bank, both located in Bangkok. The bid and ask prices of Thai baht for each bank are displayed in the table below:
Minzu Bank Sobat Bank
Bid $.0224 $.0228
Ask $.0227 $.0229
Determine whether ...view middle of the document...
If it is not appropriate, determine the profit you could generate for Blades by withdrawing $100,000 from Blades’ current account and engaging in triangular arbitrage before the rates are adjusted.
ANSWER: Triangular arbitrage is possible.
1. Exchange pounds for Thai baht ($100,000/$0.0227) | 4,405,286 |
2. Convert the Thai baht into Japanese yen (THB 4,405,286 × ¥2.69) | 11,850,219 |
3. Convert the Japanese yen into dollar (¥ 11,850,219 × $0.0086) | 101,912 |
4. Dollar profit ($101,912 – $100,000) | 1,912 |
Ben Holt has obtained several forward contract quotations for the Thai baht to determine whether covered interest arbitrage may be possible. He was quoted a forward rate of $0.0225 per Thai baht for a 90-day forward contract. The current spot rate is $0.0227. Ninety-day interest rates available to Blades in the United States are 2 %, while 90-day interest rates in Thailand are 3.75 % (these rates are not annualized). Holt is aware that covered interest arbitrage, unlike locational and triangular arbitrage, requires an investment of funds. Thus, he would like to be able to estimate the dollar profit resulting from arbitrage over and above the dollar amount available on a 90-day U.S. deposit.
Determine whether the forward rate is priced appropriately. If it is not priced appropriately, determine the profit you could generate for Blades by withdrawing $100,000 from Blades’ current account and engaging in covered interest arbitrage. Measure the profit as the excess amount above what you could generate by investing in the U.S. money market.
ANSWER: Covered interest...