Assume that you are a TL based investor and has 5000000TL. You are planning to make an investment in money markets and have 2 options. You can invest in TL securities giving you 7.5% PA OR You can invest on USD based securities giving you 1.75%pa Exchange rate for the moment is 8.25TL/USD and 3-month forward rate is 8.65TL/USD What will be your profits in both choices for 3 month forward contracts? Is there interest rate parity IRP or covered interest arbitraging? HOW? If there’s no interest rate parity between these two markets, then, what should be the equilibrium 3 month forward rate to reach IRP between 2 markets?
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