Arbitrage Analysis
After reviewing Putnam, Inc’s situation with the currency depreciation of the Thai Baht, it has become clear that indeed there are three different forms of arbitrage possible to exploit the situation and turn a profit. These forms of arbitrage are locational, triangular, and covered interest. While it would be great to try them all, we understand it is only feasible to do the most profitable. This analysis will review all three forms of arbitrage and determine which form will be the most profitable.
Locational arbitrage is possible when one banks Ask price is lower than another banks Bid price. When this happens, an individual can purchase the currency at the Ask price of the first bank, and sell this currency to the second bank to at the Bid price. Thus, turning a profit. In the case of Putnam, a profit of $431.03 can be made. To do this, Putnam would need to withdraw $100,000 from their checking account and use it to buy Baht from Minzu bank at the Ask quote of $.0232. This would exchange into 4310344.83 Thai Baht, which would then be sold to Sobat Bank at the Bid price of $.0233. Putnam would receive $100431.03 from Sobat Bank for the profit margin mentioned prior. Because locational arbitrage is available, this will cause the Ask and Bid rates of Minzu and Sobat banks to change to find the equilibrium that will eliminate arbitrage opportunities. Because there would be a high demand of buying Thai Baht at Minzu Bank, the Ask price at Minzu would increase, while the Bid price at Sobat bank will decrease with the increased amount of sales of the Thai Baht to Sobat Bank.
Triangular arbitrage is possible when the actual cross exchange rate between two currencies differs from what it should be. In the case of Putnam Inc. a profit can be made between the United States dollar, Thai Baht, and the Japanese Yen. The exchange rate between the U.S. dollar and the Japanese Yen is 1 U.S. dollar to .0084 yen. So, you convert the $100,000 to...