Q1:

Interest rates in Turkey are currently 8.25% p.a. and in Germany interest rates are currently offered at a negative 0.5% p.a. The Euro currently trades at EUR/TRY 8.73.

Given the current spot rate of EUR/USD 1.18 and an annualised forward premium of 0.85% p.a. for the EUR against the USD, generate a forecast of the value of the USD in terms of Turkish Lira (TRY) for 2 year's time. Which equilibrium relationships are you using to generate this forecast? Show all workings.

Q2:

Three-years ago the USD/AMD exchange rate was 478.16 and today the exchange rate now sits at USD/AMD 485.71. Armenian inflation has been at rates of 1.44%, 1.08% and 1.55% over the last 3 years. In the U.S., the inflation rates have been 1.8%, 2.4% and 2.1%.

(a) Calculate today's real FX value of the USD adjusted for the past three year's inflation differential (show all working).

(b) Has the USD appreciated or depreciated in real terms over the three-year period against the Armenian Dram? By how much has its value changed in real terms (answer in percentage terms)? Clearly explain and show how it is that you know this.