Blades, Inc.

Case
Assessment of Potential
Arbitrage Opportunities

Arranged by:
Hilmiyah Amaliyati
108081100009
 Introduction
Recall that Blades, a U.S. manufacturer of roller blades, has
chosen Thailand as its primary export target for Speedos,
Blades’ primary product.

Blades’ primary customer in Thailand, Entertainment

Products, has committed itself to purchase 180,000 Speedos
annually for the next 3 years at a fixed price denominated in
bath, Thailand’s currency.

Because of quality and cost considerations, Blades also

imports some of the rubber and plastic components needed
to manufacture Speedos from Thailand.
Thailand has experienced weak economic growth and
political uncertainty. As investors lost confidence in the Thai
bath as a result of the political uncertainty, they withdraw
their funds from the country.

Ben Holt, Blades’ CFO, would like to ensure that the spot
and forward rates Blades’ bank has quoted are reasonable.

Ben Holt has identified three arbitrage opportunities as

profitable and would like to know which one of them is the
most profitable.
DISCUSSION QUESTIONS
 Answer Q1
Minzu Bank Sobat Bank
Bid $ 0.0224 $ 0.0228
Ask $ 0.0227 $ 0.0229

Locational Arbitrage
$ 100,000
1) Buy Thai baht from Minzu Bank
1 THB $ 0.0227
X $ 100,000

X= $ 100,000

$ 0.0227 = THB 4,405,286.34

2) Sell Thai baht to Sobat Bank
1 THB $ 0.0228
THB 4,405,286.34 x

X = THB 4,405,286.34 × $ 0.0228 = $ 100,440.53

3) Dollar profit
Final amount $ 100,440.53
Initial amount $ 100,000
Total Profit $440.53
Answer Q2
Quoted Bid Price Quoted Ask Price
Value of a Japanese $0.0085 $0.0086
yen in U.S. dollars
Value of a Thai baht in ¥2.69 ¥2.70
Japanese yen

Triangular Arbitrage
From $ changed to Thai Bath (THB) changed to Japanese Yen
(¥) changed to $
1) Exchange $ THB
1 THB $ 0.0227
X $ 100,000

X= $ 100,000
= THB 4,405,286.34
$ 0.0227
2) Convert THB ¥
1 THB ¥ 2.69
THB 4,405,286.34 x

X = THB 4,405,286.34 × ¥ 2.69 = ¥ 11,850,220.25

3) Convert ¥ $
1 ¥ $0.0085
¥ 11,850,220.25 x

X = ¥ 11,850,220.25 × $0.0085 = $ 100,726.87

4) Dollar profit
Final amount $ 100,726.87
Initial amount $ 100,000

Total Profit $ 726.87

Answer Q3
Covered Interest Arbitrage
$ 100,000 to deposit
The current spot rate $ 0.0227
The 90-days forward rate $ 0.0225
The 90-days interest rate $ 2 percent
The 90-days interest rate THB 3.75 percent

1) Converting $ THB
1 THB $ 0.0227
X $ 100,000
X= $ 100,000

$ 0.0227 THB 4,405,286.34

2) In 90 days, the Thai deposit will mature to
Initial 1 THB $ 0.0225 THB 4,405,286.34
Interest THB 3.75 % × THB 4,405,286.34 = THB 165,196.2378

Final/total THB 4,570,484.58

3) In 90 days, convert THB $

90 days 1 THB $ 0.0225
THB 4,570,484.58 X

X = THB 4,570,484.58 × $ 0.0225 = $ 102,835.90

4) Dollar profit
Final amount $ 102,835.90
Initial amount $ 100,000

Total Profit $ 2,835.90

Answer Q4
Arbitrage opportunities are likely to disappear soon after
they have been discovered because of market forces.
Due to the actions taken by arbitrageurs, supply and
demand for the foreign currency adjust until the mispricing
disappears.
For example, covered interest arbitrage involving the
immediate purchase and subsequent sale of Thai baht would
place upward pressure on the spot rate of the Thai baht and
downward pressure on the Thai baht forward rate until
covered interest arbitrage is no longer possible.
At that point, interest rate parity exists, and the interest rate
differential between the two countries is exactly offset by the
forward premium or discount.