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

Question:

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 $0.3310/Turkish lira (TL). (LG 9-7)

a. If the forward rate is $0.3420/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

(available through Connect or your course instructor).

AppendixLO1

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