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Generate through covered interest arbitrage

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Reference no: EM132049262

Quotes for the U.S. dollar and Thai baht (Bt) are as follows: Spot contract midpoint S0 Bt/$ = Bt24.96/$ 1-year forward contract midpoint F1 Bt/$ = Bt25.64/$ 1-year Eurodollar interest rate i$ = 6.125% per year a. Your newspaper does not quote 1-year Eurocurrency interest rates on Thai baht. Make your own estimate of iBt. b. Suppose that you can trade at S0 Bt/$, F1 Bt/$, and i$ and that you also can either borrow or lend at a Thai Eurocurrency interest rate of iBt = 10 percent per year. Based on a $1 million initial amount, how much profit can you generate through covered interest arbitrage?

Reference no: EM132049262

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