CAN YOU EXPLAIN ME THE SOLUTION PLEASE, WHERE THE CALCULATIONS IN THE SOLUTIONS COME FROM?

Question $2$

The practice of investing in a currency that offers the higher return on a covered basis is

known as covered interest arbitrage. Currently, the six month Euro Libor rate is $-0\mathrm{.}52\%$ per

annum, and the six month TR libor rate is $18\mathrm{.}06\%$ per annum. If the spot rate is $8\mathrm{.}5013$ TRY

per Euro and the forward rates are as stated below,

a$)$ What is $6M$ Forward rate for euro?

b$)$ Do you have a covered interest arbitrage opportunity?

c$)$ If yes, how?

d$)$ How much is the arbitrage amount you can enjoy if you can borrow up to $1$ million

euros or its equivalent Turkish Lira?

Answer $2$

a$)8,5013+0,7096=9,2109$

b$)$ Interest rate difference $=18,58\%$ Forward Premium $=2**0,\frac{7096}{8},5013=16,69\%$

Yes, since interest rate difference is greater than forward premium

c$)$ Since interest rate difference is greater than forward premium, invest in higher

yielding currency $(()$ and borrow $().$

d$)$

Arbitrage is either $8,904$ or $82,013$ t$.$ If you long $997,400$ right enough to payback

you sell all your accumulated $,$ you end up with extra $8,904(1,006,304-997,400)$

more than enough to payback your $$ loans.