5. Covered interest rate arbitrage (intermediate). As a trader for the London-based money market Commonwealth Fund, you
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5. Covered interest rate arbitrage (intermediate). As a trader for the London-based money market Commonwealth Fund, you see the following quotes:
a. From Barclays Bank, one-year sterling deposits/loans at 6.0 percent to 6.125 percent.
b. From Bangkok Bank, one-year Thai baht (THB) deposits/loans at 12.50 percent to 12.75 percent. Spot exchange rate is THB 45 = £1, and one-year forward Thai baht is at a 6.00 percent annual discount vis-à-vis the pound sterling.
Do you see profitable opportunities for interest rate arbitrage? What are the risks, if any, involved in these transactions?
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