ECN$4200$ Homework$-3$

Question $1$: April $23$rd$,2011$ issue of the Economist reports $1$ year Treasury vields in the US and Turkay as $4\mathrm{.}28\%$ and $6\mathrm{.}25\%$ respectively. $(25$ points$)$

a$.$ Why do you think the interest rates are so high in Turkey as compared to the US$?(15$ points$)$

b$.$ Based on the reported interest rates, what would be the $1$ year forecast of Turkish Lira. $($Assume that current spot rate is USO$/$TRY $1\mathrm{.}5300).$ Can the interest rate differentials explain the change in the exchange rate? $(10$ points$)$