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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