International Financial Management ----Assignment #2
After having read and understood the case, we discussed as a group our thoughts on the case to ensure that we all were on the same page. Once all of the questions had been written, we each cross checked all of the problems and added our own information to the parts that we thought needed more explanation. As a result, every member understands the case, agreed with the group, and contributed equally.
1. The foreign exchange rates are not appropriate and as a result, locational Arbitrage is possible. If Blades buys Thai Baht from Minzu Bank at their Ask price of $.0227 and then sell that Thai Baht to Sobat Bank at their bid price of $.0228, Blades would make a profit of $440.53.
Buy Thai Baht from Minzu Bank:
($100,000) / ($.0227)= 4,405,286.34 Thai Bhat
Sell Thai Baht to Sobat Bank:
(4,405,286.34 THB) * ($.0228)= $100,440.53
$100,440.53 – $100,000= $440.53
We could make a riskless profit of $440.53 before exchange rates were adjusted. This is an example of locational arbitrage.
2. The foreign exchange rates are not appropriate and as a result, triangular arbitrage is possible. If Blades buys Thai Bhat using dollars, converts the Bhat into Japanese Yen, and converts the Yen back into dollars, we will see riskless profit from triangular arbitrage.
All calculations below are based on Minzu Bank’s rates for Bhat, Dollars and Yen.
Buy Thai Bhat using Dollars:
$100,000/$.0227= 4,405,286.34 THB
Sell Thai Bhat for Japanese Yen
(4,405,286.34 THB) * (Y 2.69)= Y 11,850,220.25
Sell Japanese Yen for USD
(Y 11,850,220.25) * ($0.85) = $100,726.87
We could make a riskless profit of $726.87 before exchange rates were adjusted. This is an example of triangular arbitrage.
3. Solution; Under the IPR condition, according to the formula P=(1+ih)/(1+if) -1 ,
The premium ,P...