Covered and Uncovered Interest Rate Parity

Can anyone clearly differentiate ‘covered interest rate parity rule’ and ‘uncovered interest rate parity rule’ in most straightfoward way?


Uncovered interest rate parity: combination of PPP and Int’l Fisher Relation and its linear approximation is => %Change in spot = R(fc) - R(dc) Here you’re dealing with change in current Spot rate and Expected Spot rate. Covered or just Interest rate Parity: (Fwd - Spot)/Spot = R(fc) - R(dc) Here you’re dealing with Fwd premium or discount. Hope this helps…

Uncovered uses E(S) …the expected spot rate whic is uncertain Covered uses F …the forward rate which is certain and fixed today.