Turkish Lira Power Point Presentation

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					Turkish New Lira
    David Bull
   Amy Mettling
   Seth Ohringer
   Scott Beville
       History of Turkish Lira
• In 1996, the Turkish money supply of Lira
  grew 130% leading to hyperinflation.
• In the 1960s, the Lira traded for about 9 per
  USD but in early 2003, the currency traded
  for 1,650,000 per US Dollar.
• On Jan. 1, 2005, the New Turkish Lira was
  issued and each New Turkish Lira was worth
  1,000,000 Turkish Lira.
• This helped stabilize prices and inflation in
 Technical Analysis

One Week Forecast reveals a
    strengthening Lira
       Methods and Analyses
• Moving Average Crossover Strategy:
  Moving spot rate crossed the 180-day average
  line and has continued to rise since mid-April;
  signaling strength
• Market momentum: Currency shows overall
  strengthening over past 30 days, especially over
  the past two weeks
• Bollinger Band Analysis: Moving spot is
  well under the upper-level Bollinger Band and
  shows no sign of bursting out of it
Graphical Analysis

This inverted graph shows a combination of things; the
green line being the 180-day average, within the blue area
is included within the Bollinger Band. Time period is 31
Oct, 2005 to 1 May, 2006
Short-term Graphical Analysis

   This inverted graph shows the past 30 days as well as the 60-day moving
   average (green line). Time frame is 1 April, 2006 to 1 May, 2006
       Implications & Advice
• For a global firm headquartered in the US
  and with manufacturing operations in
  Turkey; the New Lira is strengthening
  against the dollar which means the company
  will suffer decreasing revenues due to
  increased relative local costs
• In order to combat this, the company has a
  couple options if they choose to cover their
  open position…
• One-week forward contract
  – this would cover their position in anticipation
    of the continued strengthening of the New Lira
• Arrange a call option contract
  – for a price, this will allow the company to set a
    ceiling level for the New Lira at which the
    option will kick in and will save the company
    from an exchange loss
• Given the circumstances, my
  recommendation would be for the
  company to sign a forward contract IF they
  choose to cover their open position at all
  Asset Choice Model

Turkish interest rates are relatively
  higher than US interest rates
The Central Bank of Turkey kept
the rates unchanged at 13.5% to
   borrow and 16.5% to lend.
  Although in 2005 the Turkish
 Central Bank cut interest rates
           nine times.
  The central bank has been fighting it’s
   30 year inflation by lowering interest
    rates and tightening the monetary
United States (4.75%) and the Euro
           zone (2.25%)
• I do not recommend a Foreign Direct Investment
  into Turkey.
• The country is still changing and is very risky for
  an investor who does not know what new
  policies will be in place in the next three months.
• The Lira currency is at unstable levels and a US
  business investing in Turkey will have to hedge
  their short term exposure with forward contracts
  and options.
I predict the Turkish Lira, within the next three months,
   to continue to follow its current erratic movements
                   against the US dollar.
The New Lira has been on a strengthening trend within
      the last 20 days, but the trend shows an equal
               decrease after the strengthen.

• Oven though the interest rates are higher in
  Turkey than the US, they are constantly being
  adjusted to normal levels to catch up to the
  lowered inflation rates. I would not recommend
  trying to take advantage of this interest rate
Balance of Payment Model

 The Current Account deficit shows
  that the currency will weaken in
        the next three months
 The list shows the Turkish Current Account deficit,
              (in millions of US dollars)
                  10-2005 -881.00
                  11-2005 -2615.00
                  12-2005 -3751.00
                  01-2006 -2431.00

                  02-2006 -3487.00

    As stated on the first page of the Central Bank of
   Turkey website, “The primary objective of the Bank
    shall be to achieve and maintain price stability.”
 Since the Turkish Central Bank plans to eliminate the
   public debt as one of the tools to fight inflation; the
country will need a lot of foreign capital to finance their
   Since it is a long term fight against public debt and
  inflation I do not predict the Lira to strengthen in the
                     next three months.
The Lira will stay at current levels against the US dollar
and will not strengthen until inflation and the debt is at
                       desired levels.
    US company implications
• For a US company manufacturing in
  Turkey with a weakening Lira
  – US will benefit with lowered costs in US term
• US company selling to Turkey with a
  weakening Lira
  – US will be at risk because there will be
    decreased demand from more expensive US
    products relative to domestic products
       Relative PPP

With a small inflation differential,
  the New Turkish Lira will not
depreciation too much relative to
         the US Dollar.
               Relative PPP
• After the introduction of the New Turkish Lira,
  the inflation rate has begun to stabilize.
• At the same time, the United States’ annual
  inflation rate has been experiencing an uphill
• Both currencies are expected to hover around
  4% annual inflation in the next few years.
     Annual Inflation Rate
       (percentage %)
     2003   2004   2005   2006
                    PPP Results
• Variables:
   –   Current Spot as of 4/27/06: 1.3214/US$1
   –   Expected US future annual inflation rate: 3.7%
   –   Expected Turkish future annual inflation rate: 4%
   –   Inflation differential = (4% - 3.7%) 0.3%
        • The New Turkish Lira should depreciate by 0.3%
• Relative PPP Spot = Current Spot x (1 +
  infhome)^n/(1 + infforeign)^n
   –   = 1.3214 x (1.04)^5/(1.037)^5
   –   = 1.3214 x 1.2166/1.1992
   –   = 1.3214 x 1.0145
   –   = 1.3406
• For a Turkish Manufacturer:
  – The next five years look good in terms of
    exporting goods outside of Turkey
• For an American company exporting to
  – Set up a factory in Turkey because soon
    enough, it will be expensive to export to
• Finding the annual inflation rate for 2005
  was not hard to find.
• Necessary to know previous years’
  inflation rate because of Turkey’s
• Finding the inflation rates for the past
  couple of years was difficult for both
  Turkey and the US.
International Fisher Effect
     5 Year Forecast
  The IFE forecasts that the New
  Turkish Lira will weaken against
  the USD in the next five years.
     International Fisher Effect
• Current spot rate: 1.3287 (European terms: 1
  USD = 1.3287 TRY) April 28, 2006
• Turkey 5 Year Bond Yield on 4/10/06 (1736
  day): 15.09%
• US 5 Year Bond Yield: 4.91%
• New Turkish Lira 5 Year Forecast Rate
    = Current Spot rate * (1+inthome)^5 / (1+intforeign)^5
     = 1.3287 * (1.1509^5 / 1.0492^5)
     = 2.1102
            Data Collection
• US rate was very easy to find due to the
  US’s stable economy
• Turkish government issued 5 year bond
  was much more difficult to find
  – Auction prices
  – Interest rates ranged from 12% to over 15%
    over the past 4 months
• US firm manufacturing in Turkey:
  – global diversification should still be used to
    cover any unknown economic exposure
• US firm exporting to Turkey:
  – cover its accounts receivable or transaction
    exposure by a long forward contract