Orange Inc Case Study
Because of quality and cost considerations, Orange also imports mom of the rubber and plastic components needed to manufacture Speed’s from Thailand. Lately, Thailand has experienced weak economic growth and political uncertainty. As investors lost confidence In the Thai baht as a result of the political uncertainty, they withdrew their funds from the country.
This resulted in an excess supply of baht for sale over the demand for baht in the foreign exchange market, which put downward pressure on the bath’s value.
As foreign investors continued to withdraw their funds from Thailand, the bath’s value continued to deteriorate. Since Orange has net cash lows In baht resulting from its exports to Thailand, a deterioration In the bath’s value will affect the company negatively. Dan Kant, Orange’s SCOFF, would like to ensure that the spot and forward rates Orange’s bank has quoted are reasonable. If the exchange rate quotes are reasonable, then arbitrage will not be possible.
If the quotations are not appropriate, however, arbitrage may be possible. Ender these conditions, Kant would like Orange to use some form of arbitrage to take advantage of possible misprinting in the foreign exchange market. Although Orange Is not an arbitrageur, Kant believes that arbitrage opportunities could offset the negative impact resulting from the bath’s depreciation, which would otherwise seriously affect Orange’s profit margins. Kant has identified three arbitrage opportunities as profitable and would like to know which one of them is the most profitable.
Thus, he has asked you, Orange’s financial analyst, to prepare an analysis of the arbitrage opportunities he has Identified. This would allow Kant to assess ten preponderantly AT retagged opportunities very quickly.
1 . The first arbitrage opportunity relates to location arbitrage. Kant has obtained pot rate quotations from two banks in Thailand: Minis Bank and Sabot Bank, both located in Bangkok. The bid and ask prices of Thai baht for each bank are displayed in the table below: Determine whether the foreign exchange quotations are appropriate.
If they are not appropriate, determine the profit you could generate by withdrawing $100,000 from Orange’s checking account and engaging in arbitrage before the rates are adjusted. 2.
Besides the bid and ask quotes for the Thai baht provided in the previous question, Minis Bank has provided the following quotations for the U. S. Alular and the Japanese yen: Determine whether the cross exchange rate between the Thai baht and Japanese yen is appropriate.
If it is not appropriate, determine the profit you could generate for Orange by withdrawing $100,000 from Orange’s checking account and engaging in triangular arbitrage before the rates are adjusted. 3. Dan Kant 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 $. 227. Ninety-day interest rates available to Orange in the United States are 2 percent, while 90-day interest rates in Thailand are 3.
5 percent (these rates are not annulled). Kant is aware that covered interest arbitrage, unlike location 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 enervate for Orange by withdrawing $100,000 from Orange’s 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.
4. Why are arbitrage opportunities likely to disappear soon after they have been discovered? To illustrate your answer, assume that covered interest arbitrage involving the immediate purchase and forward sale of baht is possible. Discuss how the bath’s spot and forward rates would adjust until covered interest arbitrage is no longer possible. What is the resulting equilibrium state called?
