Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey.

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Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6624/Turkish lira (TL). (LG 9-7)

a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $5 million? What is the spread earned?

b. At what forward rate is this arbitrage eliminated? The following problem is related to Appendix 9A material in this chapter. See www.mhhe.com/sc5e.

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