# Interest Rate Parity Question

Can someone help explain the below to me. It would seem that for the second part, if spot Pounds are expensive that you aught to convert to Pounds at the forward rate. My thinking has a hitch somewhere along the way. # 1 year U.S. Interest Rates = 8% # 1 year U.K. Interest Rates = 10% # 1 year /₤ forward rate = 1.70 # Current /₤ spot rate = 1.85 Bowman knows that if the forward rate is lower than what interest rate parity indicates, the appropriate strategy would be to borrow: A) pounds, convert to dollars at the spot rate, and lend the dollars. B) pounds, convert to dollars at the forward rate, and lend the dollars. C) dollars, convert to pounds at the spot rate, and lend the pounds. Your answer: B was incorrect. The correct answer was A) pounds, convert to dollars at the spot rate, and lend the dollars. If the forward rate is lower than what the interest rate parity indicates, the appropriate strategy would be: borrow pounds, convert to dollars at the spot rate, and lend dollars. (Study Session 4, LOS 18.h) Bowman also knows that if the forward rate is higher than what interest rate parity indicates, the appropriate strategy would be to borrow: A) dollars, convert to pounds at the spot rate, and lend the pounds. B) dollars, convert to pounds at the forward rate, and lend the pounds. C) pounds, convert to dollars at the spot rate, and lend the dollars. Your answer: B was incorrect. The correct answer was A) dollars, convert to pounds at the spot rate, and lend the pounds. If the forward rate is higher than what interest rate parity indicates, the appropriate strategy would be: borrow dollars, convert to pounds at the spot rate, and lend the pounds. (Study Session 4, LOS 18.h)