Question

"Small Corp. would like to forecast the value of the Turkish lira five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the United States is 11 percent, while the Turkish five-year interest rate is 15 percent. Based on this information, the Turkish lira should ____ by ____ percent over the next five years."

Answer 1

depreciate by 16.22 percent

Step-by-step explanation:

Small Corp. would like to forecast the value of the Turkish lira five years from now using forward rates. Unfortunately, Small is unable to obtain quotes for five-year forward contracts. However, Small observes that the five-year interest rate in the United States is 11 percent, while the Turkish five-year interest rate is 15 percent. Based on this information, the Turkish lira should depreciate by 16.22 percent (15% + 1.22%) over the next five years. Depreciating its interest rate by 16.22% would enable them to forecast accurately.