Response to the following problem:
Assume that annual interest rates are 5 percent in the United States and 4 percent in Turkey. An FI can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The spot rate is $0.6624/Turkish lira (TL).
a. If the forward rate is $0.6735/TL, how could the bank arbitrage using a sum of $5 million? What is the spread earned?
b. At what forward rate is this arbitrage eliminated?