IRP application to short-term financing. Assume that the UK interest rate is 7% and the euro’s interest rate is 4%. Assume that the euro’s forward rate has a premium of 4% (is 4% more expensive in terms of

£s?). Determine whether the following statement is true: ‘Interest rate parity does not hold; therefore, UK firms could lock in a lower financing cost by borrowing euros and purchasing euros forward for one year’. Explain your answer.