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 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.

Specifically, you have to explain in details not only how you solve a problem but more importantly why you approach a problem in a certain way. You need to respond to a question with an explanation to the extent that a person without a financial background will be convinced. For example, when you are asked to explain whether a cross exchange rate (or a forward rate) is priced appropriately, you have to actually calculate and present the appropriate cross exchange rate (forward rate) to justify your explanation. Need interest rate parity figured out as well.