Could you solve each problem, and please explain the steps needed for each quest

Question

Could you solve each problem, and please explain the steps needed for each question because I'm confused on what do because I don't understand the concepts behind how to solve it.

1)

Locational Arbitrage

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

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 rates are adjusted

2) triangular arbitrage

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 to the Japanese yen:

QUOTED BID PRICE

QUOTED ASK PRICE

Value of a Japanese yen in U.S. dollars

Value of a Thai baht in Japanese yen

2.69

2.70

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

3)

Covered Interest Arbitrage

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 $0.0225 per Thai baht for a 90-day forward contract. The current spot rate is $0.0227. Ninety-day interest rates are available to Blades in the United States for 2%, while 90-day interest rates in Thailand are 3.75% (these are NOT annualized). Holt is aware that covered interest rate arbitrage, 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, determine the profit you could generate 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)

IRP

Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involving the immediate purchase and forward sale of baht is possible. Discuss how the bahts spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called?

MINZU BANK

SOBAT BANK

Explanation / Answer

Use the following information to calculate the arbitrage profit as follows:

Bid price for minzu bank is 0.0224 and for sobat bank is 0.0228

Ask price for minzu bank is 0.0227 and for sobat bank is 0.0229

Observe that the ask price should be less and the bid price should be more, as the person buys at less and sells at high price.

Calculate the profit as follows:

Buy from minzu bank and sell at sobat bank.

100000/0.227= 44052836.34

44052836.34*0.0228=100440.53

Calculate the amount of profit as follows:

$100440.53-$100000 = $440.53

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