Can someone please explain #20 from Reading 13 in Econ? The question reads:
The international parity condition Goldsworthy will use to provide the estimate of the future JPY/GBP spot rate is most likely:
a. Covered parity is used to calculate the forward rate through no-arbitrage conditions – here the question is asking about estimating the future spot rate
c. the relative ppp talks about inflation differentials – no where in the question are you provided with inflation numbers
b. uncovered parity talks about future spot rate using interest rate differentials. the exhibt provides some interest rates of JPY and GBP. bingo
Covered interest rate parity doesn’t predict future exchange rates; it simply prevents arbitrage.
Relative PPP is ex post, not ex ante.