Blades Inc Chapter 7th

In: Business and Management

Submitted By j8888888
Words 690
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Homework 8 Page 252
1) Yes! The foreign exchange are not appropriate, it is possible to complete local arbitrage. It would be profitable if you purchased Thai baht from Minzu bank at the asking price of $.0227 and sold it to Sobat bank at $.0228. The profit would be $441.00 for local arbitrage.
• Purchase $100,000 worth of Baht at $.027 from Minzu Bank at the ask rate = 100,000/.0227= $4,405,286 Bahts
• Sell 4,405,286 Bahts to Sobat bank at the Bid rate at $.0228= $100,441.00
• Holt used $100,000 and after transaction received $100,441 so profit from this arbitrage is $441.00
2) Yes! The cross exchange rate between the Thai baht and Japanese yen are not appropriate. Using Triangular arbitrage accounting for the bid and ask spread Holt would be purchasing Thai baht with US dollars, then purchasing Japanese yen with the Thai Baht, and using Yen to Rebuy US dollars. Your profit would be $727.00 US dollars.
• Purchase $100,000 worth of Thai Bahts from Minzu bank at the ask price of $.0227= 100,000/.0227= $4,405,286 Bahts
• Purchase Yen at the rate $2.69 per Baht using the $4,405,286 Thai Bahts= $4,405,286*$2.69= $11,850,219 Yen
• Convert $11,850,219 yens to US dollars at the bid rate of $.0085= $11,850,219*.0085= $100,727 US Dollars
• Finally $100,727-$100,000= $727 profit of US dollars after completing triangular arbitrage.
3) Yes! Covered arbitrage is possible because the forward price rate is not appropriate. By converting $100,000 to Thai bat’s and depositing it in an interest bearing account, then selling a contract forward on the amount of the baht’s plus interest. After 90 day converting your forward amount back to dollars at the bid rate and netting a profit.
• Convert $100,000 US dollars into Thai baht’s at the spot rate of $.0227= 100,000/.0227= $4,405,286 baht’s. Depositing this into a Thai bank account that is paying a 3.75%interest rate.…...

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