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At what forward rate is this arbitrage eliminated

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Reference no: EM132208225

Question - Assume that annual interest rates are 4 percent in the United States and 3 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6652/Turkish lira (TL).

a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $9 million? What is the spread earned?

b. At what forward rate is this arbitrage eliminated?

Reference no: EM132208225

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