Explore BrainMass

Explore BrainMass

    Interest Rate Parity

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Suppose the interest rate on 1-year loans in the United States is 3 percent while in the United Kingdom the interest rate is 5 percent. The spot exchange rate is $1.87/£ and the 1-year forward rate is $1.84/£. In what country would you choose to borrow? To lend? Can you profit from this situation?

    © BrainMass Inc. brainmass.com October 1, 2020, 10:42 pm ad1c9bdddf
    https://brainmass.com/business/foreign-exchange-rates/interest-rate-parity-237675

    Solution Preview

    Suppose the interest rate on 1-year loans in the United States is 3 percent while in the United Kingdom the interest rate is 5 percent. The spot exchange rate is $1.87/£ and the 1-year forward rate is $1.84/£. In what country would you choose to borrow? To lend? Can you profit from this situation?

    In what country would you choose to borrow?
    Borrow $ in US
    To lend?
    Lend in ...

    Solution Summary

    Determines in which country to borrow using interest rate parity condition.

    $2.19

    ADVERTISEMENT