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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
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 |
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