Question 1:

Suppose we are on 1 January 2019. A Turkish exporter has sold goods abroad. S/he will receive 1 million Euros on 31 March 2019.

S/he wants to be sure how much Turkish liras s/he will have on 31 March. The spot rate on 1 January 2019 is 6.0636 Turkish liras per Euro.

The relevant yearly TL interest rate is 30% or 0.30. The relevant yearly Euro interest rate is 2.4% or 0.024.

NOTE THAT our exporter can solve her/his problem (= to FIX the TL amount s/he will have on 31 March) as follows:

Borrow Euros on 1 January, immediately convert them into Turkish Liras and deposit them in an interest earning account for 3 months. Thus s/he will know how many Turkish

Liras s/he will have on 31 March. Also when 31 March comes s/he will receive the 1 million Euros from exporting. Use that money to pay back the Euro loan.

a) IMPLEMENT the above strategy and state how many Turkish Liras our exporter will have on 31 March 2019.

b) Now let us introduce a bank which offers buying Euros forward on 1 January 2019. Namely the bank stands ready (on 1 January 2019) to quote a TL per Euro rate

which will be valid for 31 March 2019 (when the exporter will receive her/his payment). STATE what that TL per Euro rate should be.

NOTE: in solving this problem forget about bid ask spreads or buying rate versus selling rate distinction.

WORTH 25 points