# Conditions of covered and uncovered interest parity

This is a sample Question, please provide an answer and explanation.

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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#### 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.