Essay on Assessment of Potential Arbitrage

797 Words Dec 26th, 2011 4 Pages
Assessment of Potential Arbitrage Opportunities:

Question: 01
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 the foreign exchange quotations are appropriate.
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ANSWER: Triangular arbitrage is possible.
Triangular Arbitrage

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 |

Question: 03

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
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