Blades Inc Case Study, business and finance homework help

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Attached below is the case study and the rubric for the requirements for this case.

Crucial elements for this assignment:

Minimum of 1 Full page to 2 pages double spaced

Step by Step Calculations are required to be submitted for questions 1-3. The step-by-step calculations should include between three and five steps explained for each of the problems.

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If you follow the rubric there should be no issues.

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INT 620 Module Eight Homework Guidelines and Rubric Read the “Blades, Inc. Case” on page 252 in Chapter 7 of your textbook. Answer questions 1-4 at the end of the case. Your submission should include step-by- step calculations to accompany your answers for questions 1-3. This submission is expected to be 1–2 pages. Note: You do not need to provide the calculations for question 4. Calculations are required only for questions 1-3. Your answers for questions 1–3 should consist of one statement and step-by-step calculations, as sampled in the problems on page 233 your textbook. Your statement should state if the arbitrage opportunity is possible. Your step-by-step calculations should include between three and five steps explained for each of the problems. Guidelines for Submission: Your submission must be a one-to two-page Microsoft Word document with double spacing, 12-point Times New Roman font, one- inch margins, and at least three sources cited in APA format. Three different hedging techniques are discussed in the final submission. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Accuracy of Calculations Value 40 Needs Improvement (70%) Calculations are inaccurate and/or the student did not include all of the steps needed Not Evident (0%) Calculations are inaccurate and the student did not provide an explanation of their calculations Arbitrage 40 Proficient (100%) Detailed calculations including explanations of each step taken to accurately complete the problem Explains the process that forces arbitrage opportunities to disappear after the arbitrage opportunity has been discovered Submission has no major errors related to citations, grammar, spelling, syntax, or organization The process that forces arbitrage opportunities is unclear Articulation of Response 20 Submission does not include an explanation of the process that forces arbitrage opportunities to disappear Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas Submission has major errors related to citations, grammar, spelling, syntax, or organization that negatively impact readability and articulation of main ideas Earned Total 100% 253 Chapter 7: International Arbitrage and Interest Rate Parity Holt has identified three arbitrage opportunities as profitable and would like to know which one of them is the most profitable. Thus, he has asked you, Blades' financial analyst, to prepare an analysis of the arbitrage opportunities he has identified. This would allow Holt to assess the profitability of arbitrage opportunities very quickly. 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 cross exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could gen- erate for Blades by withdrawing $100,000 from Blades' checking account and engaging in triangular arbitrage before the rates are adjusted. 3. 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 $.0225 per Thai baht for a 90-day forward contract. The current spot rate is $.0227. Ninety-day interest rates available to Blades in the United States are 2 percent, while 90-day interest rates in Thailand are 3.75 percent (these rates are not annualized). Holt is aware that covered interest arbi- trage, 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, deter- mine the profit you could generate for Blades 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. Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involv- ing the immediate purchase and forward sale of baht is possible. Discuss how the baht's spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called? 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. 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 $.0085 $.0086 Value of a Japanese yen in U.S. dollars Value of a Thai baht in Japanese yen ¥2.69 ¥2.70 customer BLADES, INC. CASE Assessment of Potential Arbitrage Opportunities Recall that Blades, a U.S. manufacturer of roller blades, As foreign investors continued to withdraw their funds has chosen Thailand as its primary export target for from Thailand, the baht's value continued to deterio- Speedos, Blades' primary product. Moreover, Blades? rate. Since Blades has net cash flows in baht resulting primary in Thailand, Entertainment from its exports to Thailand, a deterioration in the Products, has committed itself to purchase 180,000 baht's value will affect the company negatively. Speedos annually for the next 3 years at a fixed price Ben Holt, Blades' CFO, would like to ensure that the denominated in baht, Thailand's currency. Because of spot and forward rates Blades' bank has quoted are quality and cost considerations, Blades also imports reasonable. If the exchange rate quotes are reasonable, some of the rubber and plastic components needed to then arbitrage will not be possible. If the quotations are manufacture Speedos from Thailand. not appropriate, however, arbitrage may be possible. Lately, Thailand has experienced weak economic Under these conditions, Holt would like Blades to use growth and political uncertainty. As investors lost con- some form of arbitrage to take advantage of possible fidence in the Thai baht as a result of the political mispricing in the foreign exchange market. Although uncertainty, they withdrew their funds from the coun- Blades is not an arbitrageur, Holt believes that arbitrage try. This resulted in an excess supply of baht for sale opportunities could offset the negative impact resulting over the demand for baht in the foreign exchange mar- from the baht's depreciation, which would otherwise ket, which put downward pressure on the baht's value. seriously affect Blades' profit margins. 253 Chapter 7: International Arbitrage and Interest Rate Parity Holt has identified three arbitrage opportunities as profitable and would like to know which one of them is the most profitable. Thus, he has asked you, Blades' financial analyst, to prepare an analysis of the arbitrage opportunities he has identified. This would allow Holt to assess the profitability of arbitrage opportunities very quickly. 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 cross exchange rate between the Thai baht and Japanese yen is appropriate. If it is not appropriate, determine the profit you could gen- erate for Blades by withdrawing $100,000 from Blades' checking account and engaging in triangular arbitrage before the rates are adjusted. 3. 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 $.0225 per Thai baht for a 90-day forward contract. The current spot rate is $.0227. Ninety-day interest rates available to Blades in the United States are 2 percent, while 90-day interest rates in Thailand are 3.75 percent (these rates are not annualized). Holt is aware that covered interest arbi- trage, 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, deter- mine the profit you could generate for Blades 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. Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involv- ing the immediate purchase and forward sale of baht is possible. Discuss how the baht's spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called? 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. 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 $.0085 $.0086 Value of a Japanese yen in U.S. dollars Value of a Thai baht in Japanese yen ¥2.69 ¥2.70
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Explanation & Answer

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Locational Arbitrage
Purchased Thai Baht from Minzu Bank
Thai Baht are sold to Sobat Bank
The Dollar Profit is calculated

Triangular Arbitrage
The dollars are exchanged for Thai baht ($100,000/$0.0227)
The Thai baht are converted into the Japanese yen (4,405,286.34 × ¥2.69)
The Jananese yen are converted into the dollars (¥11,850,220.26 × $0.0085)
The dollar profit is calculated ($100,726.87 – $100,000)

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