-US bond interest rate: 5%

-Turkish bond interest rate: 30%

-One year ahead rate: 32 TL (valid price for Futures contract in BIST VIOP) -Spot rate valid for today: 27 TL

1- According to the covered interest rate differential theory, would the US investor find it appropriate to invest in bonds in Turkey under these conditions?

2- Could it be better to invest with an exchange rate forecast (e t+1) instead of taking a position in the futures contract at the end of the investment period (1 year)? Discuss the reasons.

3- Explain how the equilibrium state (CD = 0) can be achieved under these conditions.

Answer rating: 100% (QA)

1 According to the Covered Interest Rate Parity CIRP theory an investor will be indifferent in investing in bonds in either countries if the forward e... View the full answer