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Questions: 25 pts each 1. Assume that you are Turkish Lira (TL) based investor and has 5,000,000 TL. You are planning to make an investment
Questions: 25 pts each 1. Assume that you are Turkish Lira (TL) based investor and has 5,000,000 TL. You are planning to make an investment in money markets and have two options: (a) You can invest in TL securities giving you 7.5 percent per annum; or (b) you can invest on USD based securities giving you 1.75 percent per annum. Exchange rate for the moment is 8.25 TL USD and 3-month-forward rate is 8.65 TL/USD. Please answer the following questions: a. What will be your profits in both choices for 3-month-forward contracts? b. Is there interest rate parity (IRP) or covered interest arbitraging? How? c. If there is no interest rate parity between these two markets, then, what shoud be the equilibrium 3-month forward rate to reach IRP between two markets
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