Problem on International Parity Relationships and Foreign Exchange Forecasting

(Textbook, Chapter 6)

2. The magazine of Economist reports that the interest rate per annum is 5.93% in the United

States and 70.0% in Turkey. Why do you think the interest rate is so high in Turkey? Based on

the reported interest rates, how would you predict the change of the exchange rate of Turkish

lira against the U.S. dollar (assuming the US$ is the home currency)? Which international

parity relationship (theory) is the most pertinent to such prediction? (Hint: Please use the exact

equation instead of an approximation to calculate the percentage of change. Be careful of the

quotation.)