4 and 5 DECIMALS PLEASE. thank you Assume that annual interest rates are 5 perce

Question

4 and 5 DECIMALS PLEASE. thank you

Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6567/Turkish lira (TL).

If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $6 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

At what forward rate is this arbitrage eliminated? (Do not round intermediate calculations. Round your answer to 5 decimal places. (e.g., 32.16161))

If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $6 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

Explanation / Answer

Forward rate is giveb by : Spot * 1+USD intt factor/1+TL factor

: 0.6567*1.05/1.04

= $0.66301/TL

b. The forward rate of $ 0.66301/TL is the rate at which arbitrage is eliminated.

a. The TL forward rate in the is $ 0.6735/TL, Forward is overpriced , therefore we sholud sell TL forward

Arbitarge Involves:

1. Borrow $6million, So payable after one year= 6*1.05= $6.30

2. convert into TL getting 6/0.6567= TL 9.13659

3.Invest TL @ 4% , Receiveableafter one year= 9.13659*1.04= TL9.50206

4. Sell TL forward @$ 0.6735/TL , Inflow will be= 9.50206*0.6735= $6.39964

Arbitrage profit= ( 6.39964-6.30)=$ 0.09964 per TL

Spread Earned= 0.09964/6 *100= 1.6606%

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