The current spot rate is TRL 2.8/USD and the forward rate quoted by your regular bank is TRL 2.94/USD. This bank also offers 270 day deposits and loans with an interest rate of 9% p.a. for TRL deposits/loans and 1% p.a. for USD deposits/loans. Yield is TRL 40 million in 270 days.

Assume that percentage changes of the exchange rate are normally distributed. The 1%-quintile of the standard normal distribution is -2.3263. The volatility of the exchange rate is 0.3 (250 days were used for the volatility calculation) and the expected annualized percentage change of the exchange rate is 5%. The current spot rate is TRL 2.8/USD.

1) You decide to us the forward hedge. How large is the VAR of the hedged Turkish lira position (assuming that your counterparty will honor the forward contract)?

2) 90 days later, markets have calmed down and the emerging market fixed income fund would fulfill the risk limit without hedge. Your boss asks you to calculate the gain/loss from selling the forward entered 90 days earlier. Now the current spot rate is TRL 2.81/USD and on Bloomberg you see the following interest rate quotes:

	USD	TRL
(90 days)	1.00% p.a.	8.50% p.a.
(190 days)	1.25% p.a.	9.00% p.a.
(270 days)	1.30% p.a.	9.50% p.a.