1. The US 1-year interest rate is 5% per year and the 1-year UK interest rate is 3%. The spot rate is $1.55/pound and the 1-year forward rate is $1.60/pound.

   1. The optimal strategy is for an investor to borrow pounds because the pound is at a forward premium

   2. The optimal strategy is for an investor to borrow dollars

   3. Interest Rate Parity holds, so there is no advantage to borrowing dollars or pounds

   4. The optimal strategy is to borrow pounds because UK interest rates are lower

Answer rating: 100% (QA)

Interest Rate Parity IRP is a financial principle that suggests that the difference in interest rates between two countries should be equal to the difference in their forward exchange rates In this case the 1year interest rate ... View the full answer