Question

You are the CFO of a US manufacturer that exports to Thailand. You have received spot rate quotations from two banks in Thailand, Minzu Bank and Sobat Bank, both located in Bangkok.

The bid and ask prices of Thai baht for each bank are displayed in the table below:

Minzu Bank (THB/$)

Bid $0.0224 Ask $0.0227

Sobat Bank (THB/$)

Bid $.0.0228 Ask $0.0229

a). Are these direct quotes or indirect quotes for the US manufacturer? Are they quoted in European or American terms?

b). Determine whether there is an arbitrage opportunity. If there is, determine the profit you could generate by withdrawing $100,000 from the company's chequing account and engaging in arbitrage before the rates are adjusted.

Answer 1

Answer a) Direct quotation is a method to express the currency exchange, where a foreign currency is expressed in domestic currency.

Here, the quotation will be direct for the US Manufacturer.

European quotation terms, the specific currency expressed per unit U.S. dollar.

So, The quotation is American for the US manufactures.

Answer b) The arbitrage can buy from Minzu Bank at Ask price and sell to Sobat Bank at Bid price.

for Minzu Bank : Buy THB , conversion of $ 100,000 to THB at $ 0.0227

=$ 100,000 /$ 0.0227=THB 4405286

for Sobat Bank : selling THB , conversion of THB 4405286 to $ at $ 0.0228

=THB 4405286*$ 0.0228 = $ 100440.5

Profit on the arbitrage = $ 100440.5 - $ 100000= $ 440.5