Question

If both covered interest parity and uncovered interest parity hold, then the expected future spot rate is equal to the: current forward rate. current interest rate. current spot rate. interest rate spread.

Answer 1

There is often interest rates on products. If both covered interest parity and uncovered interest parity hold, then the expected future spot rate is equal to the current forward rate.

What is the covered interest parity and uncovered interest parity?

Covered interest parity is known to be one that involves using forward contracts to handle an exchange rate.

The uncovered interest rate parity is used mostly in forecasting rates and not handling exposure to foreign exchange risk.

In equilibrium, if both uncovered and covered interest parity hold, the condition that should exist is that the forward rate will equal the expected future spot rate.

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