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3. Richard Cruso 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 $.0230 per Thai baht for a 90-day forward contract. The current spot rate is $.0229 per Thai Baht. Ninety-day interest rates available to Putnam in the United States are 6 percent, while 90-day interest rates in Thailand are 8 percent (these are annualized rates). Cruso is aware that covered interest 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 for Putnam by withdrawing $100,000 from Putnams 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.

1.

The first arbitrage opportunity relates to locational arbitrage. Cruso 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.

	Ask Quote	Bid Quote
Minzu Bank
Sobat Bank

Determine whether the foreign exchange quotations are appropriate. If they are not appropriate, determine the profit you could generate by withdrawing $100,000 from Putnams checking account and engaging in arbitrage before the rates are adjusted. Discuss the impact of locational arbitrage on the exchange rates in the market

3.

Topaz Bank has provided the following quotations for the U.S. dollar and the Japanese yen:

Value of Thai Baht in US dollars	$.0232/Thai Baht
Value of a Japanese yen in U.S. dollars
Value of a Thai baht in Japanese yen	2.69/Thai Baht

Determine whether the exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could generate for Putnam by withdrawing $100,000 from Putnams checking account and engaging in triangular arbitrage before the rates are adjusted. Discuss the impact of triangular arbitrage on the exchange rates in the market.

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