Question1: Did the intervention effort by the Thai government constitute direct or indirect intervention? Explain.
Question 2: Did the intervention by the Thai government constitute sterilized or non-sterilized intervention? What is the difference between the two types of intervention? Which type do you think would be more effective in increasing the value of the baht? Why?
Question 3: If the Thai baht is virtually fixed with respect to the dollar, how could this affect U.S. levels of inflation? Do you think these effects on the U.S. economy will be more pronounced for companies such as Blades that operate under trade arrangements involving commitments or for firms that do not? How are companies such as Blades affected by a fixed exchange rate?
Question 4: What are some of the potential disadvantages for Thai levels of inflation associated with the floating exchange rate system that is now used in Thailand? Do you think Blades contributes to these disadvantages to a great extent? How are companies such as Blades affected by a freely floating exchange rate?
Question 5: What do you think will happen to the Thai Baht’s value when the swap arrangement is completed? How will this affect Blades?
Question3: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 available to Blades in the U.S. 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 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 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.
Covered Interest Arbitrage
1. On the first day, conversion of the U.S. dollars to Thai Baht and also setting up a ninety-day deposit account with the Thai’s bank ($100,000/$0.0227)
2. In ninety days, the Thai deposit matures to Thai Baht 4,405,286.34 × 1.0375,which reflects the forward sold amount.
3. In ninety days, the Thai Baht is changed to U.S. dollars based on the rate agreed on (Thai Baht 4,570,484.58 × $0.0225)
4. at the ninetieth day, the U.S. dollar amount present is U.S. deposit ($100,000 × 1.02)
5. The dollar profit over and beyond the dollar quantitypresent on a 90-day U.S. deposit ($102,835.90 – $100,000)
Question4: 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 Baht’s spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called?
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