If spot exchange rate is $/pound 5, US interest rate is 10%, UK interest rate is 7%, inflation in US is 7%, inflation in UK is 4% then the forward rate is (find exact answer up to three decimals):

$/pound 5.140

$/pound 4.860

$/pound 4.864

$/pound 5.144

Based on interest rate parity, the larger the degree by which the U.S. interest rate exceeds the foreign interest rate, the:

smaller will be the forward discount of the foreign currency.

larger will be the forward discount of the foreign currency.

smaller will be the forward premium of the foreign currency.

larger will be the forward premium of the foreign currency.