Interest Rate Parity Application to Short-Term Financing Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is true: "If interest rate parity does not hold, U.S. firms could lock in a lower financing cost by borrowing euros and purchasing euros for ward for one year." Explain your answer.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 20, Problem 11QA
Textbook Problem

Interest Rate Parity Application to Short-Term Financing Assume that the U.S. interest rate is 7 percent and the euro’s interest rate is 4 percent. Assume that the euro’s forward rate has a premium of 4 percent. Determine whether the following statement is true: "If interest rate parity does not hold, U.S. firms could lock in a lower financing cost by borrowing euros and purchasing euros for ward for one year." Explain your answer.

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