You has obtained forward contract quotations for the Thai baht to determine whether covered interest arbitrage may be possible The quoted forward rate is $0 0245 per Thai baht for a 90 day forward contract The current spot rate is $0 0238 Ninety day interest in the U S is 2 25 percentage, whereas 9...

To determine whether covered interest arbitrage may be possible we need to compare the actual forward rate with the calculated forward rate using inte ...

You has obtained forward contract quotations for the Thai baht to determine whether covered interest arbitrage may

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Question:

You has obtained forward contract quotations for the Thai baht to determine whether covered interest arbitrage may be possible.

The quoted forward rate is $0.0245 per Thai baht for a 90-day forward contract.
The current spot rate is $0.0238.
Ninety-day interest in the U.S. is 2.25 percentage, whereas 90-day interest rates in Thailand are 3.5 percentage (these rates are not annualized).

Requirements:

a. Determine whether the forward rate is priced appropriately.

b. If it is not, determine the profit you could generate by borrowing $400,000 from the a US bank and engaging in a covered interest arbitrage strategy.