Difference between covered and uncovered interest rate parities.

CFA Level II
#1

This one really does not goes into my head.

I remember that:

1)In Uncovered interest rate parity-it is not bound by arbitrage and does not hold over the short run.In un covered interest rate parity,we find the expected spot rates by multiplying the ratio of interest rates between domestic and foreign currency with current spot rate.The investors are risk neutral as per UIP.

2)The covered interest rate parity is bound by arbitrage and we find forward rates through it.

3)When both covered and un covered interest rate parities hold we get F=Expected future spot rate.This means that pure expectation theory holds.

Is there any other difference between the two??

#2

Not really.

#3

Thanks sir.

#4

You’re welcome.