(Solution) - Assume that the U S interest rate is 7 percent and -(2025 Original AI-Free Solution)

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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: ?Interest rate parity does not hold; therefore, U.S. firms could lock in a lower financing cost by borrowing euros and purchasing euros forward for one year.? Explain your answer.