4 Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involving the immediate purchase and forward sale of baht is possible. Discuss how the baht’s spot and forward rates would adjust until covered interest arbitrage is no longer possible.

What is the resulting equilibrium state called?

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.