4.12 Quotes for the U.S. dollar and Thai baht (Bt) are as follows: Spot contract midpoint S0 Bt∕$ = Bt24.96∕$ 1-year forward contract midpoint F1 Bt∕$ = Bt25.64∕$ 1-year Eurodollar interest rate i$ = 6.125% per year a. Your newspaper does not quote 1-year Eurocurrency interest rates on Thai baht. Make your own estimate of iBt. b. Suppose that you can trade at S0 Bt∕$, F1 Bt∕$, and i$ and that you also can either borrow or lend at a Thai Eurocurrency interest rate of iBt = 10 percent per year. Based on a $1 million initial amount, how much profit can you generate through covered interest arbitrage?
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