# Blade Case - Chapter 7

791 Words Jun 9th, 2012 4 Pages
1. 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. If they are not appropriate, determine the profit you could generate by withdrawing \$100,000 from Blades’ checking account and engaging in arbitrage before the rates are adjusted.

Answer: Here Locational Arbitrage is possible.

Locational Arbitrage: a) Buy Thai baht from Minzu Bank (\$100,000/\$0.0227) =
The current spot rate is \$0.0227. Ninety-day interest rates available to Blades in the U.S. are 2 percent, while 90-day interest rates in Thailand are 3.75 percent (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’ checking 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: Here Covered Interest arbitrage is possible.

Covered Interest Arbitrage

a) On Day 1, convert U.S. dollars to Thai baht and set up a 90-day deposit account at a Thai bank (\$100,000/\$0.0227) = 4,405,286.34

b) In 90 days, the Thai deposit will mature to (THB 4,405,286.34 × 1.0375), which is the amount to be sold forward = 4,570,484.58

c) In 90 days, convert the Thai baht into U.S. dollars at the agreed-upon rate (THB4,570,484.58 × \$0.0225) = 102,835.90

d) Dollar amount available on a 90-day U.S. deposit (\$100,000 × 1.02) = 102,000.00

e) Dollar profit over and