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If the forward premium of dollars per pound is positive and IRP holds, are interest rates higher in the US or in the UK?...

If the forward premium of dollars per pound is positive and IRP holds, are interest rates higher in the US or in the UK?

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Answer #1

As per interest rate parity, an investor is indifferent between investing in two countries

I.e. any higher interest rate in one country is offset by corresponding decline in exchange rate

Since the forward premium of dollars per pound is positive, it means that the interest rates are higher in UK as dollar has appreciated against pound in forward rate, interest rate in US must be lower

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