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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).

a. 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))

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

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92717113

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