3 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 £0.015 per Thai baht for a 90-day forward contract. The current spot rate is £0.0151. Ninety-day interest rates available to Blades in the United Kingdom 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 British pound profit resulting from arbitrage over and above the amount available on a 90-day UK 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 UK money market.

Recall that Blades, a UK manufacturer of roller blades, has chosen Thailand as its primary export target for

‘Speedos’, Blades’ primary product. Moreover, Blades’ primary customer in Thailand, Entertainment Products, has committed itself to purchase 180 000 Speedos annually for the next three years at a fixed price denominated in baht, Thailand’s currency.

Because of quality and cost considerations, Blades also imports some of the rubber and plastic components needed to manufacture Speedos.