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    Conditions of covered and uncovered interest parity

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    Explain how the conditions of covered interest parity and uncovered interest parity are reached, and indicate the implications of the analysis for the prediction of the future spot rate.

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    https://brainmass.com/economics/exchange-rates/conditions-covered-uncovered-interest-parity-182521

    Solution Preview

    Covered interest parity, or, interest parity condition (defined by www.wikipedia.org) means that the following equation holds:
    (1 + Rd) = (F/S) (1 + Rf)
    or F = S(1 + Rf)/(1 + Rd)
    where:
    Rd is the domestic interest rate implied by debt of a given maturity;
    Rf is the interest rate in the foreign country for debt of the same maturity;
    S is the spot exchange rate, expressed as the price in domestic currency (say, $) of one unit of the foreign currency E, i.e. $/E;
    F is the forward exchange rate implied by a forward contract ...

    Solution Summary

    The conditions of covered interest parity and uncovered interest parity are summarized.

    $2.19