Central Bank of Republic of Turkey decided to increase policy interest rates from 17 % to 19 %. Using the asset approach show how this policy is expected to influence the value of Turkish lira. Show your answer on a graph as well. b) Evaluate the effect of the policy described in part (a) on real exchange rate and expected real interest rate. c) Considering the inflation and interest differential between the US and Turkey, what is likely to happen to real exchange rate in Turkey? Calculate and show your answer.

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Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.