EOC, Reading 19 #5 Why do they breakup the IRP relation? I don’t understand it. All of the variables needed for the equation are given in the example? Why couldn’t you just calc it out and see if the relationship holds?
My guess is that they are just testing your ability to calculate what the actual forward rate should be based on covered interest rate parity, and then have you compare that to a market forward price to determine if there is an arbitrage situation. They give you the spot, the rates in both countries and the forward. Its up to you to take the spot, multiply it by the interest rate differential, and them compare it to the forward price given.
Makes sense, it was a long night last night.