Question
Turkey currently has a nominal 1-year risk-free interest rate of 7%, which is primarily due to the high level of expected inflation. The U.S. nominal
Turkey currently has a nominal 1-year risk-free interest rate of 7%, which is primarily due to the high level of expected inflation. The U.S. nominal 1-year risk-free interest rate is 1%. The spot rate of the Turkish lira is currently $0.2637. The 1-year forward rate of the lira is $0.2450. What is the forecasted percentage change in the lira if the spot rate is used as the 1-year forecast? What is the forecasted percentage change in the lira if the forward rate is used as the 1-year forecast? Which of the two forecasts do you think will be more accurate? Explain
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