Question
Could you solve each problem, and please explain the steps needed for each question because I'm confused on what do because I don't understand the
Could you solve each problem, and please explain the steps needed for each question because I'm confused on what do because I don't understand the concepts behind how to solve it.
1)
Locational Arbitrage
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 | $ 0.0224 | $0.0228 |
ask | $0.0227 | $0.0229 |
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 rates are adjusted
2) triangular arbitrage
Besides the bid and ask quotes for the Thai baht provided in the previous question, Minzu Bank has provided the following quotations for the U.S. dollar to the Japanese yen:
| QUOTED BID PRICE | QUOTED ASK PRICE |
Value of a Japanese yen in U.S. dollars | $0.0085 | $0.0086 |
Value of a Thai baht in Japanese yen | 2.69 | 2.70 |
Determine whether the cross exchange rate between the Thai baht and the Japanese yen is appropriate. If it is not appropriate, determine the profit you could generate for Blades by withdrawing $100,000 from Blades checking account and engaging in triangular arbitrage before the rates are adjusted.
3)
Covered Interest Arbitrage
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 are available to Blades in the United States for 2%, while 90-day interest rates in Thailand are 3.75% (these are NOT annualized). Holt is aware that covered interest rate 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 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.
4)
IRP
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 bahts spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started