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Interest Rate Parity between the US and the UK

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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?

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This solution is comprised of a detailed explanation to answer in which country to borrow or lend.

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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 ...

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