At what forward rate is arbitrage eliminated

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Reference no: EM132018259

Assume that annual interest rates are 6 percent in the United States and 5 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6568/Turkish lira (TL).

a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $7 million? What is the spread earned? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

Spread earned %

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

Forward rate /TL

Reference no: EM132018259

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