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Eiffel in France will receive TL2 mn in 1 year against exports to Turkey. The annual...

  1. Eiffel in France will receive TL2 mn in 1 year against exports to Turkey. The annual interest rate in the next 1 year is 3% in Europe and 10% in Turkey.  Assume interest rate parity holds.
  2. Determine the appropriate forward premium or discount on TL? (7.5 points)
  3. Calculate the €s Eiffel will receive next year, assuming spot rate of EURTL is 7? (7.5 points)
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Answer #1

Given spot rate is 7

According to interest rate parity therom the currency with higher interest rate will sell in discount in forward market to cancel the arbitrage opportunity

Interest rate in Turkey is 10%

Interest in uk is 3%

Forward price = spot price (1+rh)/(1+rf)

rh is home interest rate

rf is foreign interest rate

Forward price = 7(1.1)/(1.03)

= 7.4757

Estimated spot rate 1 year from now is = 7.4757

Amount to be received is 2 million

Amount to be received in pounds is

= 2/7.4757 = 0.2675 mn

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