Blade Case - Chapter 7
1. 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 | $.0224 | $.0228 | Ask | $.0227 | $.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 the rates are adjusted.
Answer: Here Locational Arbitrage is possible.
Locational Arbitrage: a) Buy Thai baht from Minzu Bank ($100,000/$0.0227) = 4,405,286.34
b) Sell Thai baht to Sobat Bank (THB 4,405,286.34 × $0.0228) = 100,440.53
c) Dollar profit ($100,440.53 – $100,000) = 440.53
2. 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 and the Japanese yen:
| Quoted Bid Price | Quoted Ask Price | Value of Japanese yen in U.S. dollars | $.0085 | $.0086 | Value of Thai baht in Japanese yen | Y2.69 | Y2.70 |
Determine whether the cross exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could generate for Blades Inc, by withdrawing $100,000 from Blades’ checking account and engaging in triangular arbitrage before the rates are adjusted.
Answer: Here Triangular Arbitrage is possible.
Triangular Arbitrage:
a) Exchange dollars for Thai baht ($100,000/$0.0227) = 4,405,286.34
b) Convert the Thai baht into Japanese yen (THB 4,405,286.34 × Y2.69) = 11,850,220.25
c) Convert the Japanese yen into dollars (Y11,850,220.26 × $0.0085) = 100,726.87
d) Dollar profit ($100,726.87 – $100,000) = 726.87
3. Ben Holt has obtained several forward contract quotations for
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 the rates are adjusted.
Answer: Here Locational Arbitrage is possible.
Locational Arbitrage: a) Buy Thai baht from Minzu Bank ($100,000/$0.0227) = 4,405,286.34
b) Sell Thai baht to Sobat Bank (THB 4,405,286.34 × $0.0228) = 100,440.53
c) Dollar profit ($100,440.53 – $100,000) = 440.53
2. 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 and the Japanese yen:
| Quoted Bid Price | Quoted Ask Price | Value of Japanese yen in U.S. dollars | $.0085 | $.0086 | Value of Thai baht in Japanese yen | Y2.69 | Y2.70 |
Determine whether the cross exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could generate for Blades Inc, by withdrawing $100,000 from Blades’ checking account and engaging in triangular arbitrage before the rates are adjusted.
Answer: Here Triangular Arbitrage is possible.
Triangular Arbitrage:
a) Exchange dollars for Thai baht ($100,000/$0.0227) = 4,405,286.34
b) Convert the Thai baht into Japanese yen (THB 4,405,286.34 × Y2.69) = 11,850,220.25
c) Convert the Japanese yen into dollars (Y11,850,220.26 × $0.0085) = 100,726.87
d) Dollar profit ($100,726.87 – $100,000) = 726.87
3. Ben Holt has obtained several forward contract quotations for